USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A three-month T-bond futures contract (maturity 20 years, coupon 6 percent, face $100,000) currently trades at $98,781.25 (implied yield 6.11 percent). A three-month T-note futures contract (maturity 10 years, coupon 6 percent, face $100,000) currently trades at $101,468.80 (implied yield 5.80%). Assume semiannual compounding.
-Refer to Exhibit 15.4. If you expected the yield curve to steepen, the appropriate NOTE AGAINST BOND futures spread strategy would be
A) go long the T-bond and short the T-note.
B) go short the T-bond and long the T-note.
C) go long the T-bond and long the T-note.
D) go short the T-bond and short the T-note.
E) None of these are correct.

Question

Quizplus · Accepted Answer

If the yield curve steepens, longer-term bonds (T-bonds) will experience a sharper increase in yields than shorter-term notes (T-notes). Therefore, in a NOTE AGAINST BOND spread strategy, it would be appropriate to go short the T-bond and long the T-note. This would allow the investor to benefit from the difference in yield changes between the two contracts as the yield curve steepens.