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 flatten, 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 you expect the yield curve to flatten, you would go long the T-bond (expecting its price to rise as long-term yields fall) and short the T-note (expecting its price to fall as short-term yields rise).