Five Against Bond (FAB) spread is a directional spread strategy in Treasury futures that pairs positions in five-year note futures with opposite positions in long-term (15–30 year) Treasury bond futures to exploit yield-curve moves, relative value dislocations, or hedging needs. Market participants deploy FAB trades to express views on curve steepening/flattening, to reduce outright duration exposure, or to capture temporary basis and carry opportunities between intermediate and long-duration government debt. Major dealers and asset managers use FABs as a liquidity-efficient instrument, often overseen by risk desks at institutions such as J.P. Morgan, Goldman Sachs, Morgan Stanley, Citigroup, and European counterparties like Barclays and Deutsche Bank. Reporting and price signals for FAB-relevant instruments are regularly referenced on platforms including Bloomberg. For concise terminology and related entries consult FuturesTradingPedia’s glossary: https://futurestradingpedia.com/glossary-of-futures-trading-terminology/. This article dissects structure, mechanics, uses, and risk — with practical examples, a specification table, and a short FAQ to aid traders and analysts.
Definition
Definition: A five against bond (FAB) spread is a futures trade pairing a five-year Treasury note future with an opposite-position long-term Treasury bond future to exploit yield-differential moves.
- Core phrase: five-year note vs long-term bond futures.
- Alternate wording: 5s/15–30s futures spread.
- Related lookup: see glossary entry at FuturesTradingPedia glossary.
| Element | Concise Value |
|---|---|
| Strategy name | Five Against Bond (FAB) spread |
| Primary instruments | 5-year Treasury note futures and 15–30 year Treasury bond futures |
| Typical objective | Exploit yield-curve moves or reduce absolute duration |
Key takeaway: The Definition section gives a single-sentence technical label for immediate reference.
What is five against bond (fab) spread?
The five against bond (FAB) spread is a structured futures position that juxtaposes an intermediate-duration government note (typically the five-year Treasury futures) with an opposite position in a long-duration Treasury bond future (often a 20- or 30-year contract). It is used to isolate movements in the yield curve between the intermediate and long end rather than to take directional risk on absolute rates. Traders use FABs to express a view on relative steepening or flattening, to implement duration risk transfers, or to capitalize on temporary mispricings that reflect liquidity, supply-demand imbalances, or differing repo and financing dynamics across maturities. Execution is commonly facilitated through listed futures on exchanges where standard contract specifications, daily settlement and margining rules apply; counterparties and dealers, including institutions like UBS, Credit Suisse, and HSBC, often provide liquidity or block execution services. For quick reference definitions consult the glossary at https://futurestradingpedia.com/glossary-of-futures-trading-terminology/.
- Objective: isolate relative yield changes between 5-year and long-term instruments.
- Users: prop desks, hedge funds, asset managers, pension funds, and banks.
- Execution venues: listed futures exchanges with electronic order books and block trade facilities.
| Aspect | Practical detail |
|---|---|
| Primary regime | Relative-value futures spread |
| Typical counterparties | Primary dealers and portfolio managers (e.g., Goldman Sachs, J.P. Morgan) |
| Margining | Exchange-determined initial and maintenance margins, often lower for spreads |
Analogs in cash markets involve pair trades across the cash five-year note and long bonds; the futures variant offers improved leverage and standardized settlement. Traders monitoring data from Bloomberg and research from large banks can align position sizing and risk limits; see strategy notes often published by Morgan Stanley and Barclays for institutional perspectives. Key point: the FAB isolates cross-maturity dynamics while preserving relative liquidity advantages of each contract.
Key Features of five against bond (fab) spread
The five against bond (FAB) spread exhibits structural and operational features that distinguish it from outright futures trades and from simple cash-curve trades. It is principally a relative-value instrument that benefits from the correlated but non-identical drivers of intermediate and long-duration Treasury instruments. Key elements include contract pairing, margin treatment for spreads, funding and carry asymmetries, and market microstructure considerations such as liquidity and tick-size differences. Dealers at leading houses — for instance Deutsche Bank, Citigroup, and UBS — often provide price discovery and load balance to FAB flows, meaning the spread’s behavior can be influenced by dealer inventory and regulatory capital cycles.
- Paired contracts: 5-year note futures versus 15/20/30-year bond futures.
- Spread margining: exchanges often apply reduced margins for intra-product spreads; clearing-house offsets typically lower initial margin relative to two independent outright positions.
- Liquidity profile: five-year contract may trade with higher frequency; long bond futures can be thinner, affecting execution cost and slippage.
- Carry and financing: differing repo rates and carry dynamics across maturities create opportunities and costs unique to FABs.
- Settlement mechanics: cash vs physical delivery conventions matter; delivery windows in bond futures require awareness of deliverable bond sets.
- Hedging convenience: FABs allow targeted hedging of curve segments with lower capital and financing demands than cash trades.
| Feature | Implication |
|---|---|
| Spread margining | Lower capital requirement vs two outrights; tighter leverage control |
| Tick value differences | Execution cost asymmetry; must be accounted in P&L calculations |
| Deliverable basket concerns | Long bond futures may have cheapest-to-deliver nuances |
Practical example: when primary dealers report heavy long-bond net short positions after a supply shock, the FAB spread may tighten or widen depending on demand for five-year protection and long-bond availability. Insight: understanding the interaction between tick mechanics, margin offsets, and repo is essential for effective FAB deployment.
How five against bond (fab) spread Works
At execution, a five against bond (FAB) spread involves taking a long futures position in one maturity (commonly the five-year note) and an offsetting short in a long-term bond future, or vice versa. The trade’s P&L derives from the change in the price differential between the two contracts rather than the absolute movement of either contract alone. Exchanges specify contract size, tick value, and expiration; clearing members require initial and maintenance margins, which for spread positions are typically scaled to reflect correlation and reduced net risk. Settlement occurs daily via mark-to-market; on expiry, settlement method (cash vs physical delivery) depends on the specific contract. Financing and carry arise from implied yields and repo costs; traders monitor the basis between futures and underlying cash bonds to assess cost of carry and potential convergence on delivery.
- Underlying assets: Treasury notes (5-year) and long Treasury bonds (15–30 year).
- Contract specs: standardized by exchange—contract size, tick, and months vary by product.
- Margin: spread-specific margins often lower due to offsetting exposures.
- Settlement: daily mark-to-market; final settlement per contract rules.
| Operational item | Typical FAB detail |
|---|---|
| Example contract sizes | Five-year: $200,000 face; Long bond: $100,000 face (varies by exchange) |
| Example margin | Spread margin lower than two outrights; exact numbers from exchange/clearinghouse |
Short example: if a trader buys the five-year future at price A and sells a 30-year future at price B, profit/loss is realized when (A−B) moves favorably relative to the entry differential. Institutions such as Goldman Sachs and J.P. Morgan routinely model these P&L sensitivities and publish term sheets; for foundational definitions consult the FuturesTradingPedia glossary. Final insight: meticulous attention to contract specs and margin offsets turns relative-value intent into measurable trading outcomes.
FAB spread calculator
FAB spread calculator: enter five-year futures price, long-bond futures price, contract sizes, position direction to compute notional spread P&L
five against bond (fab) spread At a Glance
This table summarizes practical facts and contract-relevant information for rapid reference, aiding trade planning, risk checks, and post-trade analysis. It is intended as a concise operational snapshot for risk managers and traders preparing to place or monitor FAB positions. For further glossary cross-references and related definitions see FuturesTradingPedia glossary.
| Item | Typical value / note |
|---|---|
| Instruments | 5-year Treasury futures vs 15/20/30-year Treasury bond futures |
| Primary exchanges | Major derivatives exchanges with US Treasury futures listings |
| Common users | Hedge funds, asset managers, primary dealers (e.g., Morgan Stanley, Deutsche Bank) |
| Margining | Spread margining often applies; exact initial/maintenance margins per exchange |
| Settlement | Daily MTM; final settlement per contract (delivery specifics for bond futures) |
| Liquidity considerations | Five-year typically deeper; long bond may have wider spreads and less depth |
| Typical objectives | Curve positioning, basis capture, hedging, arbitrage across maturities |
- Quick reference: use the table to align operational checks before trade entry.
- Data sources: live pricing from Bloomberg and dealer quotes from banks like Barclays and HSBC.
Closing insight: the table condenses actionable trade parameters and highlights dependencies that influence execution cost and P&L realization.
Main Uses of five against bond (fab) spread
The five against bond (FAB) spread serves three principal market functions — speculation on curve moves, hedging specific duration or basis exposures, and arbitrage across cash-futures and across maturities. Each use-case leverages the strategy’s ability to separate relative curve dynamics from outright rate moves, providing capital-efficient exposure to curvature and slope risks. Market participants choose FABs for different tactical and strategic reasons: hedge funds seeking to extract value from temporary mispricings, pension funds managing liability-relative duration, or dealers facilitating client flows while managing inventory.
- Speculation: Express a view on yield-curve steepening or flattening between 5-year and long maturities. A trader anticipating long-term yields falling relative to five-year yields might buy long bonds and sell five-year futures to profit if the spread narrows.
- Hedging: Reduce absolute duration risk while maintaining exposure to curve shape. Pension funds and liability-driven investors can use FABs to adjust curve positioning without sizable cash market trades.
- Arbitrage: Capture mispricings between futures and the underlying cash bonds or between different futures maturities. Arbitrageurs may exploit dislocations caused by issuance, technical factors, or transient liquidity gaps.
| Use | Example |
|---|---|
| Speculation | Buy 5s / Sell 30s expecting flattening of 5s/30s curve |
| Hedging | Offset long-duration cash bond risk by transacting FAB spread |
| Arbitrage | Exploit futures-cash basis divergence between five-year and long bonds |
Regulatory and balance-sheet considerations influence who uses FABs and how. During periods of heavy long-bond issuance, for example, dealers may widen spreads to manage inventory, creating arbitrage windows. Insight: choose FAB application based on liquidity budget, desired exposure, and counterparty capabilities — often provided by major houses like Credit Suisse or UBS.
Impact of five against bond (fab) spread on the Market
The five against bond (FAB) spread contributes to price discovery and liquidity allocation across the Treasury curve. By providing a liquid avenue to trade relative value, FABs enable market participants to express nuanced views on curvature without requiring large outright positions. This concentrated provision of relative exposure can dampen volatility in outright instruments when liquidity is ample, but during stressed conditions FABs may widen the observed basis and exacerbate temporary illiquidity at the long end. Major dealer flows and inventory—driven by entities like J.P. Morgan, Goldman Sachs, and Barclays—affect the spread’s responsiveness; dealer balance sheet constraints can therefore indirectly impact quoted spreads and execution costs.
- Enhances cross-maturity price discovery by linking trades across the yield curve.
- Affects liquidity distribution: FAB flows can concentrate liquidity in spread markets relative to outrights.
- Can either reduce or amplify volatility depending on market conditions and dealer capacity.
| Market effect | Typical observation |
|---|---|
| Price discovery | Improves relative pricing between 5-year and long-term instruments |
| Liquidity provision | Depends on dealer willingness to warehouse positions |
Insight: FAB activity signals the market’s assessment of cross-maturity risk and can serve as a barometer for funding stress when long-bond liquidity thins; monitoring dealer flow commentary from institutional research (e.g., reports by Morgan Stanley or Deutsche Bank) helps contextualize moves.
Benefits of five against bond (fab) spread
The five against bond (FAB) spread confers several operational and strategic advantages for traders and risk managers. The following enumerates principal benefits and how they translate into practical gains for market participants. For background terminology and related instruments, users may reference FuturesTradingPedia glossary.
- Leverage-efficient relative exposure: Spread margining reduces capital requirement versus two separate outrights, enabling targeted curve bets with lower upfront cash.
- Improved hedging precision: Ability to alter slope/curvature exposure without large absolute-duration shifts in the portfolio.
- Execution flexibility: Access to listed liquidity and block trade channels offered by major dealers like Goldman Sachs and J.P. Morgan.
- Reduced financing costs: Spread trades can be cheaper to finance than outright positions due to offsetting repo and carry dynamics.
| Benefit | Trader impact |
|---|---|
| Capital efficiency | Lower initial margin for spread-led exposure |
| Risk targeting | Isolate slope/curve moves without large duration shifts |
Insight: when properly sized and executed, FABs deliver nuanced exposure with an attractive capital profile, making them a staple in institutional relative-value toolkits.
Risks of five against bond (fab) spread
Despite advantages, the five against bond (FAB) spread carries distinct risks that require explicit management. These risks derive from counterparty, margining, market microstructure, and basis-related exposures. Leading financial institutions and trading desks incorporate stress tests and margin simulations to quantify potential losses across rapid yield-curve shifts. For explanatory definitions related to margin and basis, consult FuturesTradingPedia glossary.
- Amplified losses via leverage: Spread margining can conceal eventual P&L amplification if correlation between legs breaks down.
- Basis and convergence risk: Futures vs cash basis and cheap-to-deliver anomalies in long-bond contracts can produce unexpected outcomes at delivery.
- Liquidity mismatch: One leg (typically long bond futures) can be significantly less liquid, increasing slippage and execution risk.
- Margin calls and funding pressure: Rapid adverse moves can generate margin calls; financing strains can force suboptimal liquidations.
- Counterparty/dealer constraints: Reduced dealer willingness to warehouse positions in stress can widen spreads and worsen exit prices.
| Risk | Mitigation |
|---|---|
| Correlation breakdown | Dynamic hedging, stress testing, and sizing limits |
| Margin call | Maintain liquidity buffers and monitor exchange margin notices |
Final insight: robust pre-trade scenario analysis that includes dealer-flow intelligence from institutions such as Citigroup and HSBC can materially reduce unexpected outcomes when trading FABs.
Brief History of five against bond (fab) spread
The five against bond (FAB) spread emerged as a formalized relative-value technique as Treasury futures markets matured in the late 20th century, evolving from cash-curve trades into listed futures strategies. Primary dealers and proprietary traders refined spread execution and margining practices as exchanges standardized contract specifications. Key milestones include widespread adoption of spread margining protocols and increased use of FABs by institutional desks following post-crisis market structure changes; contemporary commentary and research from banks such as Goldman Sachs and Morgan Stanley document the strategy’s institutionalization. For concise glossary context, see FuturesTradingPedia glossary.
- Origin: Developed alongside expansion of Treasury futures liquidity.
- Evolution: Standardized execution and margining increased adoption by 2000s–2010s.
Insight: FABs reflect the broader progression of fixed-income futures from simple hedging tools to sophisticated relative-value instruments used by banks and asset managers worldwide.
FAQ
How does spread margining affect FAB trades?
Spread margining typically reduces initial margin compared with two separate outrights because clearinghouses recognize offsetting risk; however, traders should model worst-case scenarios where correlation breaks down and margin benefits erode.
Which counterparties provide the most liquidity for FABs?
Primary dealers and international banks — including J.P. Morgan, Goldman Sachs, Morgan Stanley, Barclays, and Deutsche Bank — often provide liquidity, though availability varies with market stress and balance-sheet capacity.
What are the main execution pitfalls?
Execution pitfalls include liquidity mismatch between legs, tick-value asymmetries, and cheapest-to-deliver dynamics in bond futures; pre-trade execution planning and staggered orders can mitigate these.
Where to learn more about related futures terminology?
A practical starting point is the FuturesTradingPedia glossary: https://futurestradingpedia.com/glossary-of-futures-trading-terminology/. Institutional research from banks like Credit Suisse and UBS also contains advanced notes on curve trading strategies.
Can FAB spreads be implemented in OTC or only via listed futures?
While the classic FAB is a listed futures construct, similar relative-value positions can be replicated OTC with swaps and forwards; listed futures provide standardization and exchange-backed clearing which many institutional users prefer.