Every time traders talk about a specific trade, they always evaluate it against the forward curve.

For example, 2s5s is trading at XXX, The 5 year bond is trading at YYY. The forwards are trading at XXXXX so this is a good trade.

I'm just not getting the connection.


For example, in the US swaps market 2s5s is around 25bp right now ,and 1 year forward it is about 10bp. Therefore , you can put on a curve steepener trade on 2s5s at 10bp. If (and this is the crucial assumption) the spot yield curve slope remains the same one year from now , you make 15bp. This trade is popular because the spot yield curve is often thought to contain a term premium (thus biased to be upward sloping) but the forwards often do not reflect that and are much flatter.

  • $\begingroup$ If you put on a 2s5s steepener, doesn't this become 1s4s in one year. Or are you saying that you enter into a 1-year forward 2s5s steepener? $\endgroup$ – VanillaCall Mar 10 '18 at 12:42
  • $\begingroup$ A1yr forward 2s5s steepener , yes. $\endgroup$ – dm63 Mar 10 '18 at 13:20

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