# Yield Curve Trades: Steepeners, Flatteners and Butterflies

> Yield curve trades bet on changes in the curve's shape rather than its level. Learn steepeners, flatteners and butterflies, DV01 weighting, carry and roll down.

Source: https://learn.tradelabsai.com/bonds-credit/yield-curve-trades/  
Track: Bonds, Rates and Credit · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Yield Curve Trades: Steepeners, Flatteners and Butterflies", https://learn.tradelabsai.com/bonds-credit/yield-curve-trades/

Yield curve trades are positions designed to profit from changes in the shape of the yield curve, such as the gap between 2 year and 10 year yields, rather than from the overall level of interest rates. Macro funds, bank trading desks and bond managers use them to express views on monetary policy, inflation and growth. Because the legs offset each other's sensitivity to parallel moves, these trades isolate the slope or curvature of the curve. See [Yield Curves](https://learn.tradelabsai.com/bonds-credit/yield-curves/) for the basics.

## The main curve trades

| Trade | Construction | Profits when |
|---|---|---|
| Steepener | Long short maturity, short long maturity (DV01 weighted) | The curve steepens (long yields rise relative to short) |
| Flattener | Short short maturity, long long maturity | The curve flattens |
| Butterfly | Long or short the middle against the two wings | The middle moves relative to the wings |

## Weighting by DV01

Each leg is sized so that its DV01 (dollar sensitivity per basis point) matches the other leg, removing exposure to parallel shifts. See [DV01](https://learn.tradelabsai.com/bonds-credit/dv01/).

**Example: A 2s10s flattener**
A trader expects the Federal Reserve to keep hiking, pushing 2 year yields up more than 10 year yields. Using approximate DV01s of $190 per $1 million for the 2 year and $820 for the 10 year:

- Sell $43 million of 2 year notes (DV01 ≈ $8,170).
- Buy $10 million of 10 year notes (DV01 ≈ $8,200).

If the 2 year yield rises 30 basis points and the 10 year rises 10, the curve flattens by 20 basis points. The short 2 year leg gains about 30 × $8,170 = $245,100; the long 10 year leg loses about 10 × $8,200 = $82,000. Net gain about $163,000, roughly 20 basis points × $8,200.

## Instruments used

- **Cash Treasuries** financed in repo.
- **Treasury futures:** for example, the NOB spread (10 year notes versus 30 year bonds) or futures spreads weighted by DV01. See [Futures Spreads Explained](https://learn.tradelabsai.com/futures/futures-spreads-explained/).
- **Interest rate swaps** at different maturities. See [Interest Rate Swaps](https://learn.tradelabsai.com/bonds-credit/interest-rate-swaps/).
- **SOFR futures** for the short end.
- **Swaptions** for option based curve views.

## Butterflies

A butterfly trades the middle of the curve against the two ends, for example the 5 year against the 2 year and 10 year.

- **Long the belly (short the wings):** profits if the 5 year yield falls relative to the average of the 2 year and 10 year.
- **Short the belly (long the wings):** the reverse.

Weights are chosen so the trade is neutral to both parallel shifts and slope changes, isolating curvature. Butterflies are also used for relative value when one maturity looks cheap or rich versus its neighbours.

## Carry and roll down

Curve trades earn or pay carry while held:

- **Carry:** the yield earned on long positions minus the financing cost and yield paid on shorts.
- **Roll down:** in an upward sloping curve, a bond's yield falls as it ages toward shorter maturities, raising its price if the curve is unchanged.

A steepener in an upward sloping curve often has negative carry and roll, so the curve must steepen enough to cover these costs. Traders always calculate "breakeven" moves before entering.

## What drives curve moves

| Driver | Typical effect |
|---|---|
| Central bank hikes | Bear flattening |
| Central bank cuts | Bull steepening |
| Rising inflation expectations | Bear steepening |
| Recession fears | Bull flattening, possibly inversion |
| Heavy long bond issuance | Steepening |
| Quantitative easing at long maturities | Flattening |

See [The Federal Reserve and the FOMC](https://learn.tradelabsai.com/macro/the-federal-reserve-and-the-fomc/) and [Quantitative Easing and Tightening](https://learn.tradelabsai.com/macro/quantitative-easing/).

## Risks

- **Wrong timing:** curves can stay inverted or steep for long periods.
- **Imperfect hedges:** DV01 weights change as yields move.
- **Financing costs** for leveraged cash positions.
- **Policy surprises** and liquidity shocks.
- **Leverage:** curve trades often use large notional amounts, as in the case of Long Term Capital Management in 1998. See [The Collapse of LTCM](https://learn.tradelabsai.com/history/the-collapse-of-ltcm/).

## Frequently asked questions

### What is a yield curve steepener?

A trade that profits if the gap between long term and short term yields widens, typically long short maturity bonds and short long maturity bonds, weighted by DV01.

### What is a flattener?

A trade that profits if the gap between long and short yields narrows, typically short short maturity bonds and long long maturity bonds.

### Why are curve trades DV01 weighted?

To remove exposure to parallel moves in yields, so the trade's profit depends only on changes in the curve's shape.

Next, learn the most used rate derivative in [Interest Rate Swaps](https://learn.tradelabsai.com/bonds-credit/interest-rate-swaps/).

## Continue learning

- Next lesson: [Interest Rate Swaps](https://learn.tradelabsai.com/bonds-credit/interest-rate-swaps/)
- Previous lesson: [Yield Curves](https://learn.tradelabsai.com/bonds-credit/yield-curves/)
- Related: [Yield Curves](https://learn.tradelabsai.com/bonds-credit/yield-curves/): The yield curve plots bond yields across maturities. Learn normal, flat and inverted curves, what drives them and why inversions have signalled recessions.
- Related: [DV01](https://learn.tradelabsai.com/bonds-credit/dv01/): DV01 measures how many dollars a bond or portfolio gains or loses for a one basis point change in yield. Learn the formula, hedge ratios and how traders use it.
- Related: [Interest Rate Swaps](https://learn.tradelabsai.com/bonds-credit/interest-rate-swaps/): An interest rate swap exchanges fixed interest payments for floating ones on a notional amount. Learn how swaps work, SOFR, swap rates, valuation, uses and risks.
- Related: [Macro Trading](https://learn.tradelabsai.com/strategies/macro-trading/): Macro trading takes positions in currencies, rates, stocks and commodities based on economic views. Learn how macro traders think, build trades and manage risk.
- Related: [Futures Spreads Explained](https://learn.tradelabsai.com/futures/futures-spreads-explained/): Futures spreads buy one contract and sell a related one. Learn calendar, inter market and inter commodity spreads, margin benefits, quoting and worked examples.