Curve Trades (Steepeners, Flatteners, Butterflies)¶
One-line definition¶
DV01-neutral positions across two or more points on the curve, expressing a view on curve shape rather than the level of rates.
Construction¶
Two-leg trade: use hedge_ratio(target_dv01, hedge_instrument_dv01) from
src/pm/fixed_income/duration.py to size the offsetting leg so the
combined position has ~zero net DV01. A steepener is long the short end /
short the long end (or vice versa for a flattener); a butterfly adds a
third, belly leg.
Why PMs care¶
Two portfolios can share identical aggregate duration but react oppositely to a steepening vs. flattening curve — curve trades isolate that exposure.
Vocabulary¶
front end, belly, long end, 2s10s, 5s30s, twist — see
notebooks/fixed_income/09_duration_curve_risk.ipynb.
Limitations¶
DV01-neutral is not curve-neutral under a non-parallel shock; use key-rate duration to check the real exposure at each tenor.