Investor's wiki

Five Against Note Spread (FAN)

Five Against Note Spread (FAN)

What Is a Five Against Note Spread (FAN)?

A five against note spread (FAN) is a futures spread involving positions in five-year Treasury notes to offset positions in 10-year Treasury notes, likewise called T-notes for short.

Understanding Five Against Note Spreads (FANs)

A five against note spread (FAN) portrays a strategy utilized in futures trading. In a futures spread trade, an investor at the same time takes two places of various durations. Likewise with any paired transaction, investors expect the long leg of the trade to rise in value and the short leg to fall. The two legs of a FAN utilize five-year and 10-year Treasury notes.

Treasury notes are U.S. government bonds issued with maturities of 10 years or less. Under run of the mill conditions and a normal yield curve, longer-duration bonds will yield more than shorter-duration bonds to remunerate investors for interest rate risk. The price of a T-note or bond gets chosen by means of an auction and may end up above or below the note's face value contingent on supply and demand. High demand for notes can force investors to pay a premium over the face value, while low demand can bring about discounted prices below the bond's par value.

Illustration of a FAN Strategy

A FAN strategy settles upon an investor's prediction about the change in the price of five-and 10-year Treasury notes over the long run. In particular, investors bring in money on the off chance that the ratio of the prices of the two legs of the trade rises. To bring in money off a FAN, an investor should make a right prediction about future demand for five-year notes compared to 10-year notes.

Assuming the investor predicts economic conditions that would push markets toward longer-duration notes, then, at that point, the 10-year notes would form the long side of the FAN. In the event that the investor expects greater demand on shorter-term maturities, the five-year notes make up the long leg of the trade, and the 10-year notes make up the short leg. The greater the movement between the two types of bonds toward the trader's wagered, the greater the return.

Circumstances that produce a steepening yield curve, with more extensive differences in price between bonds of various durations, benefit this type of trade.

Bond Yields versus Bond Prices

While bonds act as the underlying assets in a FAN strategy, investors don't bring in money straightforwardly from the yield on the bond. The FAN wagers on changes in the price of the bonds over the long haul. While yields and interest rates play a job in the amount of demand for a note and its price, their influence stays indirect. Investors interested in these types of strategies ought to take care to comprehend the rationale for putting such a trade at a given time.

Highlights

  • This strategy is utilized in futures trading operations and includes an investor's prediction about the change in the price of five-and 10-year Treasury notes.
  • Bonds act as the underlying assets in a FAN strategy.
  • A five against note spread (FAN) is a futures spread including five-year Treasury notes to offset positions in 10-year Treasury notes.
  • The two legs of a FAN are held up by the utilization of Treasury notes.
  • To earn money from a FAN, an investor must make a right prediction about future demand for five-year notes compared to 10-year notes.