Invoice Spreads: A Leveraged Play on the Treasury Yield Curve

An invoice spread is a trade that involves buying and selling two different Treasury futures contracts with different delivery months. The trade is designed to profit from changes in the shape of the Treasury yield curve.

How Invoice Spreads Work

The price of a Treasury futures contract is determined by the price of the cheapest-to-deliver (CTD) bond. The CTD bond is the bond that is the most profitable for the seller to deliver. The CTD bond is determined by a number of factors, including the bond's coupon, maturity, and price.

An invoice spread is a trade on the difference between the invoice prices of two different futures contracts. The invoice price is the price that the buyer of the futures contract must pay for the bond. The invoice price is calculated by multiplying the futures price by the conversion factor.

Trading Invoice Spreads

Invoice spreads can be used to speculate on the shape of the Treasury yield curve. For example, a trader who believes that the yield curve will steepen could buy a long-dated futures contract and sell a short-dated futures contract. This trade would be profitable if the yield on the long-dated bond rises more than the yield on the short-dated bond.

Invoice spreads can also be used to hedge against changes in the shape of the yield curve. For example, a portfolio manager who is concerned about the risk of a flattening yield curve could buy a short-dated futures contract and sell a long-dated futures contract. This trade would be profitable if the yield on the short-dated bond rises more than the yield on the long-dated bond.

Risks of Trading Invoice Spreads

The main risk of trading invoice spreads is that the shape of the yield curve will not move in the expected direction. This can happen for a number of reasons, such as a change in the economic outlook, a change in monetary policy, or a change in the overall level of risk aversion in the market.

Another risk is that the trade will be difficult to execute. This can be a problem for trades that involve illiquid contracts.