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Steepener

A trade that profits when the gap between long and short yields widens, typically long the short maturity and short the long one.

A steepener is a relative trade, not a directional one. You size the two legs so their dv01 is equal, which strips out the effect of the whole curve shifting and leaves only the spread between the two points.

Steepeners are popular when the market expects cuts, because cuts anchor the front end while the long end stays put or rises on supply and inflation worries. Which flavour you get, bull-steepener or bear-steepener, determines which leg does the work.

Example: buy $10,000,000 of the 2-year with DV01 $1,900 and sell 2-year-equivalent risk in the 10-year by selling $2,340,000 face with DV01 $1,900. If 2s10s widens from +30 bp to +70 bp, the trade earns roughly 40 x $1,900 = $76,000.

Related: curve-flattener, twos-tens, bull-steepener, bear-steepener, dv01

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