A curve trade is a multi-legged position that expresses a view on the shape of the yield curve, meaning its slope, curvature, or the relative value between specific maturities, while hedging out exposure to parallel rate movements.
Common curve trade types:
All curve trades are constructed duration-neutral: the DV01 of the long leg matches the DV01 of the short leg, so the trade has zero exposure to a parallel shift in rates. Profit comes only from the change in the targeted spread.
Curve trades are sized by their DV01 per basis point of spread change. A 2s/10s steepener with 100 DV01 per leg earns 100 per basis point the 2s10s spread widens.
The slopes tool charts historical spreads, enabling traders to evaluate current spread levels against historical context.
Duration-neutral construction requires matching DV01 across both legs. Consider a 2s/10s steepener where you want 1M face value short in the 10Y. If the 10Y has a DV01 of 900 per 1M face and the 2Y has a DV01 of 190 per 1M face, you need the following 2Y long position:
1M x (900 / 190) = 4.74M face value of 2Y notes
That ratio eliminates parallel-shift exposure. A +100 bps uniform move in rates costs as much on the short 10Y as it earns on the long 2Y. The trade's only profit driver is the change in the 2s10s spread itself. A +1 bp widening earns 900 on the long leg and costs 900 on the short leg in duration terms, with net P&L derived purely from the spread move. See duration-neutral for the full DV01-matching mechanics.
The choice between a steepener and a flattener depends on the expected policy path and where the spread sits historically.
Steepeners perform best when the Fed is expected to ease. The front end rallies faster than the long end, so 2Y yields drop more than 10Y yields and the spread widens. Entering a steepener when the 2s10s is deeply negative, as it was at roughly -108 bps in July 2023, gives asymmetric upside because the spread has more room to widen than to invert further from that level. At a spread of +20 bps, a steepener still carries asymmetric upside relative to historical norms, since the 2s10s has averaged roughly +100 to +150 bps over full rate cycles.
Flatteners perform best when the Fed is hiking aggressively. The short end rises faster because policy rate increases are transmitted directly to 2Y yields, while the long end is anchored by lower long-run growth and inflation expectations. The 2015-2018 hiking cycle flattened the 2s10s from approximately +130 bps to nearly flat by late 2018. A flattener entered near the beginning of that cycle would have captured most of that move.
Relative value matters as much as the directional view. A steepener entered at historically flat levels has a better risk-reward profile than one entered when the curve is already steep. The slopes tool gives you the current spread and its full historical distribution to anchor that judgment.
Carry and roll-down are real costs on curve trades, not just theoretical footnotes.
In a positively sloped curve, a steepener carries negatively. You are long the short end, which yields less, and short the long end, which yields more. That yield differential is a daily cost. If the 2Y yields 4.20% and the 10Y yields 4.50%, the gross carry cost on the trade is approximately 30 bps per year on the notional of the long leg.
The breakeven is the amount the 2s10s spread must widen to offset that carry cost over your holding period. If you hold for 3 months, you need roughly 7-8 bps of spread widening just to break even before transaction costs. A flattener in the same curve environment carries positively, which is why flatteners are often favored as low-cost convexity trades when the curve is steep.
Roll-down adds a second dimension. On an upward-sloping curve, the 2Y note rolls up to a slightly lower yield as it seasons toward the 1Y maturity, generating roll-down gain for the long holder. The net carry-plus-roll-down figure, divided by modified duration, gives the breakeven rate move in bps per year. Knowing that number tells you whether the market needs to move toward your view quickly or whether time is on your side.
What is the difference between a curve trade and a duration trade?
A duration trade takes a view on the overall level of rates. A curve trade takes a view on the shape, or the spread between two maturities, while holding duration risk constant at or near zero. The two risks are independent and can be managed separately.
Can retail investors put on curve trades?
In practice, curve trades require two separate bond or futures positions sized to match DV01. Treasury futures (TU, TY, US) are the most common instrument for institutions. Retail access is limited, though some ETF pairs can approximate the exposure with less precision.
How do I evaluate whether a current spread is cheap or rich?
Use the slopes tool to view the current 2s10s and other spreads against their full history. A spread in the bottom decile of its historical distribution is statistically cheap for a steepener. A spread in the top decile is rich, favoring a flattener.