Curve Steepener Trade Strategy 2025: How to Profit from Yield Curve Changes and Current Prices

Gordon Scott, a Chartered Market Technician (CMT), brings over 20 years of experience as an investor and technical analyst.

What Is a Curve Steepener Trade?

A curve steepener trade is an investment tactic designed to profit from the increasing difference in yields between short-term and long-term Treasury bonds. This approach typically involves purchasing short-term Treasuries while simultaneously shorting long-term Treasuries to capitalize on a steepening yield curve.

Key Insights

• Curve steepener trades gain from growing yield spreads between Treasury bonds of differing maturities.
• The yield curve graphically represents bond yields across various maturities, usually sloping upward.
• A steepening curve means long-term bond yields rise faster than short-term yields, indicating economic growth expectations.
• This pattern often signals anticipated inflation and higher interest rates.
• Executing a curve steepener involves buying short-term and selling long-term Treasury securities.

Understanding the Yield Curve Dynamics

The yield curve plots interest rates on the vertical axis against bond maturities on the horizontal axis, ranging from 3-month T-bills to 30-year T-bonds. Normally, longer maturities carry higher yields, resulting in an upward sloping curve.

Occasionally, the curve may invert, with short-term yields exceeding long-term yields, or flatten when yields across maturities converge. The difference between short- and long-term yields is called the yield spread.

When the curve steepens, this spread widens as long-term yields increase faster than short-term yields or short-term yields decline while long-term yields rise. This environment benefits banks who can borrow cheaply short-term and lend at higher long-term rates.

For example, if a 2-year Treasury yields 1.5% and a 20-year Treasury yields 3.5%, the spread is 200 basis points. If these yields shift to 1.55% and 3.65%, the spread grows to 210 basis points, signaling a steeper curve.

When and How to Implement a Curve Steepener Trade

A steepening yield curve often reflects market expectations of stronger economic growth and rising inflation, which typically lead to higher interest rates. Investors can exploit this by entering a curve steepener trade, buying short-term Treasuries and shorting longer-term ones.

This strategy frequently employs derivatives to hedge risks associated with widening yield spreads. For instance, an investor might buy 5-year Treasury futures while shorting 10-year Treasury futures.

One favorable scenario for this trade is when the Federal Reserve lowers interest rates significantly, potentially weakening the U.S. dollar and reducing foreign demand for long-term Treasuries. This drop in demand lowers prices and raises yields on long-term bonds, increasing the yield spread and profit potential.

Bullish vs. Bearish Steepener Explained

A bear steepener occurs when inflation expectations rise, prompting the Fed to increase interest rates to control inflation. Conversely, a bull steepener happens when interest rates decline and economic growth is anticipated.

Flat vs. Steep Yield Curve: What’s the Difference?

A flat yield curve indicates similar yields across maturities, often signaling economic uncertainty. A steep yield curve suggests robust economic growth, higher inflation expectations, and rising interest rates.

Trading a Bull Steepener

To trade a bull steepener, investors buy short-term bonds and sell long-term bonds. When the yield spread widens, gains from short-term bonds outweigh losses on long-term bonds.

Conclusion

The curve steepener trade offers a strategic way to profit from macroeconomic shifts affecting the yield curve. By leveraging derivatives on Treasury bonds with different maturities, traders can position themselves to benefit from anticipated economic growth and inflation trends in 2024.

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