tastytrade logo
uploaded image

Sep 5, 2018

Trading Interest Rates via the NOB

By:Sage Anderson

While the term "interest rates" may not get your blood racing, or make you sit closer to the edge of your seat, they often present attractive trading opportunities, just like any other niche of the financial markets.

Looking at a long-term chart of 30-year Treasury rates dating back to the early 1980's, one can see that the range has been between roughly 2% and 15% over the last 35+ years. These days, 30-year Treasury rates are hovering right around 3%, which means they are closer to one extreme, as compared to the other.

While the 30-year Treasury rate has rallied from its low of around 2.25% in June of 2016, it is obviously still well below its historical average. Does that means there are opportunities available in 30-year Treasuries?

That largely depends on your unique trading approach and outlook. However, they are certainly worth a closer look, and for that reason today’s blog post focuses on a well-known interest rates trade that involves the 10-year Treasury Note and the 30-year Treasury Bond.

This spread is often referenced by the acronym "NOB," which utilizes the first letter of "Note" and the first letter of "Bond" in creating this well-known nickname.

In short, interest rate rate trades are typically accessed via bond futures products because of the strong inverse relationship that exists between interest rates and bonds prices.

For example, when long-term interest rates go up, one can reasonably expect that long-term bond values will decline and vice versa. As a result, a trader expecting long-term interest rates to rise might decide to deploy a trade that is short long-term bonds.

That same trader may also decide not to expose himself/herself to naked interest rate risk, and elect to deploy a spread instead of a single naked position. That is where spreads like the “NOB” come into play.

The "NOB" spread is structured such that the 10-year Note is traded in the reverse direction as the 30-year Bond. Therefore, if you were looking to deploy a trade that bet on an increase in long term interest rates, the associated NOB trading structure would be short 30-year Bonds versus long 10-year Notes.

In the interest rates trading universe, the above trade structure is often referred to as a “steepener,” because of the shape it would form on the yield curve (short-term rates going lower, long-term rates going higher).

As a reminder, the varying rates of interest across different maturities (from 1 month to 30 years) is referred to as the "yield curve,” and is usually presented in chart form.

The slide below illustrates two different snapshots of the yield curve - one from April of 2013, and one from April of 2018. The trade described above, the “steepener,” would effectively be a bet that the April 2018 yield curve would become more similar to the April 2013 yield curve (i.e. getting steeper as longer-term interest rates increase).


Alternatively, if you held the belief that the yield curve was going to “flatten” going forward, the associated NOB trade structure would be long 30-year bonds versus short 10-year Notes.

You also might decide that Treasury products with different maturities better fit your outlook, such as the 2-year/5-year (TUF) or the 5-year/10-year (FYT). Additional information on these bond spreads (and many more) is accessible through the search functionality on the tastytrade homepage.

It should be noted that interest rate trades such as the NOB are typically deployed in ratio fashion, which helps to balance each leg of the trade so that the “delta” risk is roughly equivalent. Traditionally, the NOB is deployed in 3 x 1 fashion (three 10-year contracts for every single 30-year contract).

For a detailed breakdown of the NOB spread, including a sample trade, we recommend reviewing this previous installment of Futures Measures, as well as this episode of Options Jive.

If you have any questions about trading interest rates using bond futures, or any other topic, don’t hesitate to leave a message in the space below, or reach out via email at support@tastytrade.com.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.