Treasury Butterfly Trade (Curvature) (N/A)
Published 2026-03-17 • by onlysofrs
Thesis Summary
Exploiting curve curvature (PC3) by going long the 5-year 'belly' and shorting the 2-year and 10-year 'wings' to capture mispricing in the Treasury yield curve during heavy supply auctions.
Quantitative Overlay
Detailed Deep Dive
The butterfly exploits Curvature (PC3).
* Long Body (5y), Short Wings (2y, 10y).
* This trade is “Market Neutral” (duration zero) and “Slope Neutral” (if weighted correctly).
* It profits if the curve becomes “more humped” or “less humped.”
2025 Regime:
* Short-end is pinned by Fed cuts.
* Long-end is loose due to fiscal deficits.
* Belly (5y-7y) is where the supply hits.
* _Trade:_ If Treasury auctions heavily in the belly, 5s cheapen relative to the interpolation of 2s and 10s. We put on a “Fly” (Long 5s, Short 2s/10s) to capture the richening after the auction digests.