Five Against Bond Spread (FAB)

What Is a Five Against Bond Spread (FAB)

A Five Against Bond Spread (FAB) is a futures trading strategy that looks to benefit from the spread between Treasury bonds of contrasting maturities by taking offsetting positions in futures contracts for five-year Treasury notes and long-term (15 to 30 year) Treasury bonds.

Understanding a Five Against Bond Spread (FAB)

A Five Against Bond Spread (FAB) is made by either buying a futures contract on five-year Treasury notes and selling one on long-term Treasury bonds or vice versa. Investors theorizing on interest rate variances will go into this type of spread in hopes of profiting from under or overpriced Treasuries.

Investors can trade futures contracts on 2-year, 5-year, 10-year, and 30-year Treasury securities. Dissimilar to options, which give holders the right to buy or sell an asset, futures commit the holder to buy or sell. These contracts are offered by the Chicago Board of Trade and are listed on March, June, September, and December cycles. Futures contracts expected to lay out a FAB have face values of $100,000 with prices quoted in points per $1,000. Contracts can be traded in tick sizes as small as 1/32 of one point or $31.25 for 30-year bonds and half of a 1/32 of a point or $15.625 for 10-year notes.

While some Treasury futures strategies are planned to hedge against interest rate risk, a FAB strategy looks to profit from rate and yield developments. FAB is one of different spread trading or yield curve trading strategies applicable in the Treasury market. The fundamental reason of these strategies is that mispricings in spreads, as reflected in futures contract prices along the Treasury yield curve, will ultimately standardize or return. Traders can profit from these developments by taking situations through futures. Spread strategies depend more on long-term moves in yields rather than the fast price action that frequently happens in equity markets.

Factors Influencing Five Against Bond Spread

Bond yields, and along these lines spreads between bonds of varying maturities, are impacted by interest rates. Short-term interest rates are most affected by the actions of the U.S. Federal Reserve as its federal asset's rate fills in as benchmark for some other interest rates. At the point when the Fed is raising rates, 2-year and 5-year Treasury yields are generally affected. Long-term bond rates are most impacted by the strength of the U.S. economy and the outlook for inflation. Assuming that the economy is developing and inflation is at 2% or higher, long bond yields are probably going to decline. These and numerous other economic and technical factors ought to be considered by investors interested in executing spread strategies.