NOB Spread
The NOB spread (Notes Over Bonds) is a futures-based fixed income spread trade in which a trader is simultaneously long U.S. Treasury Note futures and short U.S. Treasury Bond futures (or vice versa), capturing differences in yield between the 10-year and 30-year points on the yield curve.
Key takeaways
- The NOB spread is a yield curve steepener or flattener trade implemented via futures rather than cash bonds.
- A long NOB spread (long notes, short bonds) profits when the yield curve steepens (10s–30s spread widens).
- The spread is expressed in futures price points; duration weighting is essential for constructing a duration-neutral trade.
- NOB spread trading is common among fixed income hedge funds seeking to profit from changes in the yield curve shape without taking on outright duration risk.
- Key rate duration analysis helps decompose yield curve exposure across the relevant maturities.
Explanation
The NOB spread is one of the most well-known yield curve spread trades in the U.S. futures markets, executed using CME Group's Treasury futures contracts — specifically the 10-Year T-Note futures (ZN) and the Ultra Bond or Long Bond futures (ZB or UB). Rather than expressing a view on the overall level of interest rates, NOB traders express a view on the slope of the yield curve between the 10-year and 30-year maturities.
A trader who expects the yield curve to steepen — meaning the 30-year yield rises more than (or falls less than) the 10-year yield — would implement a long NOB spread: going long 10-year note futures and short 30-year bond futures. Since bond futures have longer duration, prices fall more per basis point of yield increase. When the long end sells off relative to the intermediate, bond futures underperform note futures, and the spread trade profits. The reverse trade — short notes, long bonds — is a curve flattener.
Constructing a proper NOB spread requires duration weighting. The dollar value of a basis point (DV01) of 10-year note futures differs from that of bond futures; simply buying equal quantities of each contract would result in a trade with significant residual duration exposure rather than a pure curve bet. Traders calculate the DV01 ratio and adjust contract quantities accordingly. For example, if 10-year futures have a DV01 of $750 and bond futures have a DV01 of $1,200, a duration-neutral long NOB would require buying $1,200/$750 = 1.6 note futures contracts for every bond futures contract sold.
Key rate duration analysis refines the NOB framework by decomposing yield curve exposure at specific maturity buckets. Rather than assuming parallel or uniform yield changes, key rate analysis measures how the portfolio value changes when only one point on the curve shifts — allowing traders to isolate exposure at exactly the 10-year and 30-year nodes and understand how non-parallel curve movements affect the trade.
From a macro perspective, NOB spreads widen (steepen) when the market expects higher inflation or stronger economic growth — scenarios where long-term yields rise relative to shorter maturities due to increased term premium demands. They narrow (flatten) during risk-off episodes, Fed tightening cycles where short rates rise rapidly, or when investors 'flight to quality' in long-duration sovereign bonds. The 2022 Fed hiking cycle saw dramatic NOB spread inversion as aggressive rate hikes compressed the near-term yield while concerns about long-run fiscal dynamics kept long yields elevated.
Formula
Duration-Neutral Ratio = DV01(Bond Futures) / DV01(Note Futures)
Example
A fixed income fund manager believes the U.S. yield curve will steepen over the next three months as the Fed signals a pivot to rate cuts (reducing short-term yields) while fiscal concerns keep long-end yields elevated. The fund establishes a long NOB spread: buys 100 contracts of 10-year T-Note futures at $110-16 and sells 62 contracts of T-Bond futures at $124-08 (the ratio reflects duration weighting: 62 ≈ 100 × $750 DV01 notes / $1,200 DV01 bonds). Over three months, the 10-year yield falls 30 bps while the 30-year yield falls only 10 bps — a steepening of 20 bps. Note futures gain approximately $225,000 (100 × $750 × 30) while bond futures gain approximately $74,400 (62 × $1,200 × 10). Net gain = $225,000 − $74,400 = $150,600 before commissions.
Related terms
Basis Bond Duration Dv01 Futures Contract Green Bond Inflation Key Rate Duration Premium Senior Tranche Sovereign Bond Treasury Bond