Note Against Bond Spread (NOB)

What Is a Note Against Bond Spread (NOB)?

A note against bond spread (NOB), otherwise called a note over bond spread, is a pairs trade made by taking offsetting positions in 30-year Treasury bond futures with positions in ten-year Treasury notes. Basically, it is a wagered on the relative yields of these particular debt instruments.

Understanding Notes Against Bond Spread (NOB)

The note against bond spread (NOB) or, as it is more regularly known, the note over bond spread allows futures traders to wager on expected changes in the yield curve, or the difference between long-term and short-term interest rates.

Buying or selling a NOB spread relies upon whether the investor expects the yield curve to steepen or level. The curve steepens when long-term rates rise more than short-term rates. This occurs in most normal market conditions, where the economy is growing and investors will take longer-term risks.

Alternately, the yield curve will in general smooth when investors become more gamble disinclined, or when the economy is contracting. This can demonstrate economic weakness, as the market anticipates low rates of interest and inflation. In extreme cases, the yield curve might even invert, implying that short-term notes briefly pay higher yields than long-term bonds.

Yields move conversely to bond prices. In this way, for instance, more fragile bond pricing brings about higher yields. This is on the grounds that the Treasury should offer a higher yield to make up for the reduction in market demand for bonds. More grounded bond pricing brings about lower yields since demand is high and investors require less compensation to buy bonds.

Caution

Futures trading is highly dangerous, particularly while trading on leverage. Continuously conduct intensive research before trading.

Instructions to Trade a Note Against Bond Spread (NOB)

The Chicago Mercantile Exchange (CME) routinely distributes the hedge ratio, addressing the relative yields of the treasury contracts that are expected to put on a NOB spread trade. A ratio of 2:1 recommends it requires two ten-year note contracts for every 30-year bond contract to put on the NOB trade.

A trader who expects the yield curve to smooth will sell a NOB spread. In this case, that means they will sell two contracts on ten-year notes, and buy a contract on the longer maturity, 30-year bond. On the off chance that their trade is effective, the yields for the ten-year notes will increase at a quicker rate than the yield on the 30-year bond. The value of the long-term bond will rise, relative to the price of the ten-year note.

On the other hand, on the off chance that a trader expects the yield curve to steepen, they will buy a NOB spread. This is finished by buying the shorter maturity, ten-year notes, and selling the longer maturity, 30-year bond. This trader will bring in money in the event that the 30-year bond yields increase at a quicker rate than the ten-year note yields. The market price of the short-term notes will rise relative to the value of the bond.

A trader who buys a NOB spread expects short-term interest rates to rise, relative to short-term rates.

A trader who sells a NOB spread expects long-term interest rates to rise, relative to short-term rates.

Bond Spread as an Economic Indicator

The NOB spread is a helpful indicator for market sentiment. Assuming futures traders are predominantly going short on the 30-year bond and long on the ten-year note, this is an indication that the common market sentiment expects longer-term interest rates to rise.

Alternately, assuming traders are predominantly going long on the 30-year bond and short on the ten-year note, it mirrors their conviction that longer-term market interest rates will fall.

Highlights

• An investor who buys a NOB will bring in money in the event that the yield curve steepens from now on. An investor who sells a NOB will bring in money on the off chance that the yield curve straightens.
• Changes to the NOB spread over the long haul can give an image of how the market expects the yield curve to change.
• A note against bond spread, or a note over bond spread (NOB), is a pairs trade made by taking offsetting positions in 30-year Treasury bond futures with positions in ten-year Treasury notes.
• A note against bond spread allows futures traders to wager on changes to the yield curve, the difference among long-and short-term treasury rates.