five against note spread: definition, uses, and strategies explained

The five against note spread (FAN) is a specialist futures spread that pairs positions in five‑year and ten‑year U.S. Treasury note futures to trade yield curve dynamics. Market participants use the structure to express relative value views between intermediate and longer maturities, hedge duration exposure, or pursue arbitrage across cash and futures markets. Activity in FANs reflects expectations about monetary policy, growth, and inflation, and liquidity for the spread often concentrates in hours around major macro releases and Treasury auctions. In practice, institutions such as investment banks and asset managers link FAN exposure to cash positions, basis trades, or portfolio immunization programs. The following sections define the term, explain operational mechanics, list the structural features, give illustrative contract facts, and outline uses, market impact, benefits, and risks for traders and risk managers working with this instrument.

Definition

Definition of five against note spread

Five against note spread (FAN): a futures spread that offsets positions in five‑year Treasury note futures against positions in ten‑year Treasury note futures to trade the relative price between the two maturities.

• This single-sentence definition focuses on the core structure of the instrument.

What is five against note spread?

What is the five against note spread?

The five against note spread (commonly abbreviated FAN) is a relative‑value futures strategy that simultaneously takes opposing positions in futures contracts tied to the U.S. Treasury five‑year note and the ten‑year note. The trade is not directional on the absolute price of notes alone; it is a bet on the change in the price relationship, or ratio, between the two maturities. Market participants use FANs to isolate expectations about the slope of the yield curve in the 5‑ to 10‑year segment: when the curve is expected to steepen, the long leg typically is the longer maturity and the short leg the shorter, and vice versa for flattening views.

In futures markets, FANs are executed on venues such as the CME Group, where liquidity and standardized contract specifications reduce execution and settlement friction. The strategy is distinctive because it combines interest‑rate sensitivity differences (duration and convexity) with microstructure effects like delivery options and cash/futures basis. Traders often pair FAN positions with cash Treasury holdings to create hedged portfolios or to arbitrage pricing inconsistencies between the cash and futures markets.

FANs are used by a range of market participants, including fixed‑income desks at banks, hedge funds, pension plans, and insurance companies. For example, a pension fund with overweight exposure to 10‑year duration but concerned about near‑term volatility in the 5‑year sector might use a FAN as a lower‑cost, margin‑efficient way to adjust relative duration without transacting large volumes in the cash market. Sources such as Bloomberg and Reuters commonly report FAN implied spreads when discussing Treasury futures microstructure around major events, while analytics from Moody’s Analytics or S&P Global help interpret macro drivers behind curve shifts.

• Core purpose: express a view on the relative movement between 5‑yr and 10‑yr Treasury futures.
• Primary venues: listed futures exchanges such as the CME Group.
• Typical users: banks, asset managers, hedge funds, pension funds, insurers.
• Data sources: market data from Bloomberg, economic analysis from J.P. Morgan or Goldman Sachs.

Insight: FANs function as a focused instrument for trading the mid‑segment of the U.S. yield curve and can be combined with other spreads (e.g., calendar spreads) to build multi‑leg rate strategies. This practical concentration on a 5‑ to 10‑year window makes FANs distinct from broader curve trades and provides a compact vehicle to express policy‑sensitive views.

Key Features of five against note spread

Principal structural and operational attributes

The five against note spread contains a set of definable features that shape execution, risk, and suitability for different market roles. Below are the principal characteristics that traders, risk managers, and investors should understand before deploying FAN positions.

• Paired futures legs: One leg in the five‑year Treasury note futures and the other in the ten‑year Treasury note futures. Legs can be long or short depending on the directional view on the slope between maturities.
• Standardized contract specs: Both legs use exchange‑listed, standardized contract sizes and delivery months as per the CME Group specifications, which govern tick size, minimum fluctuations, and settlement conventions.
• Relative‑value focus: The strategy profits from changes in the price spread or ratio between the two legs rather than absolute moves in either contract.
• Margin efficiency: Exchanges recognize spread positions as lower risk relative to outright positions, typically yielding reduced margin requirements versus two equivalent outright positions.
• Settlement method: Most FAN legs are cash‑settled or physically deliverable under exchange rules; the spread itself is managed via offsetting futures positions prior to contract expiration to avoid delivery unless part of a cross‑market basis trade.
• Liquidity concentration: Liquidity for FANs can cluster around macroeconomic releases, Treasury auctions, and central bank announcements; market participants need to account for intraday and cross‑market liquidity differences.
• Correlation dependency: Profitability depends on the historical and evolving correlation between five‑ and ten‑year instruments; regime changes in rate policy can alter that correlation.
• Interaction with cash market: FANs are frequently paired with cash bond positions, enabling basis trades and synthetic funding structures.

Operational specifics often cited by market participants and data providers (e.g., Investopedia, Morningstar) include tick value computations for each contract, the typical intraday spread ranges, and historical volatilities for the 5/10 segment. For execution desks, the primary considerations are order routing (lit vs. block trades), slippage management, and the potential for sudden basis divergence around auctions or large dealer inventory changes.

Examples illustrate feature interactions: a dealer executing a customer‑facing passthrough might hold an offsetting FAN to neutralize exposure, benefiting from lower exchange margin while keeping the cash inventory matched. Institutional traders use analytics from Fitch Ratings or economic forecasts from J.P. Morgan to anticipate curve shifts and size FAN legs accordingly. Understanding these features permits structured application of FANs in hedging, speculation, and arbitrage frameworks.

How five against note spread works

Mechanics, contract specs, margin and a short example

At the operational level, a five against note spread consists of taking an offsetting long and short position in the respective futures contracts. The legs are executed as two standardized futures contracts listed by the CME Group, each with defined contract sizes, tick increments, and delivery or cash‑settlement rules. Exchanges typically provide reduced margin for spread exposures because exchange risk models recognize the partial offset in interest‑rate risk between the 5‑ and 10‑year maturities. Traders must still monitor intraday margin and potential concentration charges during periods of elevated volatility.

Key contract and operational elements to consider:

• Underlying assets: U.S. Treasury notes—five‑year and ten‑year—serve as the economic basis for the futures contracts.
• Contract specifications: standardized contract size (face value per contract), tick size and value, delivery months, and last trading day as defined by the listing exchange.
• Margin requirements: exchange margin is generally lower for spreaded positions; brokers may apply different maintenance margins and increase requirements under stressed conditions.
• Settlement: depending on the contract, settlement may be cash or involve a delivery mechanism; many traders roll spreads prior to delivery to avoid having to deliver or accept notes.
• Execution: spread trading can be executed via single‑order spread functionality on the exchange or via two legged orders; single‑order execution reduces the risk of slippage between legs.

Short example: a trader expecting the yield curve to steepen between the 5‑ and 10‑year points might buy the 10‑year futures and sell the 5‑year futures, creating a long 10/short 5 FAN. If the price ratio increases or the 10‑year futures outperform the 5‑year futures in price terms (i.e., relative price of long leg rises), the spread position produces a profit after accounting for transaction costs and margin funding. Conversely, if the 5‑year outperforms, the spread narrows and the position may incur a loss.

Practical execution nuance: some desks implement FANs as part of basis trades—buying or selling the futures legs while simultaneously taking offsetting positions in the cash Treasury market to capture mispricings between cash yields and futures implied yields. Data vendors such as Bloomberg and research from Goldman Sachs often provide spread history and implied forward rates that help size FAN trades; meanwhile, regulatory and clearing documentation (e.g., Options Clearing Corporation and exchange clearing notices) outline margin treatment and stress scenarios relevant to these positions.

List: operational checks before entering a FAN position

1. Confirm contract months and delivery conventions on CME Group documentation.
2. Verify spread margin levels with the clearing broker and simulate stressed margin calls.
3. Assess liquidity in both legs for the chosen expiration months and look for single‑order spread functionality to reduce execution risk.
4. Model expected P&L under alternative interest‑rate scenarios and basis moves.
5. Plan exit strategies, including roll schedules and cash offset hedges to manage delivery risk.

five against note spread At a Glance

Concise contract facts and comparative metrics

This table summarizes key facts that clarify how a five against note spread is structured and compares essential metrics relevant to trading and risk management. It is intended to serve as a compact reference for desks and investors.

• Data providers and research firms such as Investopedia, Morningstar, and Moody’s Analytics provide supplemental explanations and historical context for FANs and yield‑curve instruments.
• Regulatory and clearing documentation from exchange websites and clearing houses detail margin and settlement conventions; traders should reference CME Group notices before execution.

Main Uses of five against note spread

Speculation

Speculators use the five against note spread to express a directional view on the relative performance of the 5‑yr vs 10‑yr segment without taking large absolute duration exposure. For example, a hedge fund anticipating that near‑term monetary easing will cause longer maturities to rally relative to shorter maturities will buy the 10‑year leg and sell the 5‑year leg. The position magnifies relative moves due to leverage inherent in futures and benefits from lower spread margin compared to two outright positions.

• Short sentence: FANs enable leveraged, margin‑efficient relative‑value bets.
• Example: a steepening scenario creates a directional profit for long 10/short 5.

Hedging

Institutional investors and asset managers use FANs to hedge relative duration or basis risk within fixed‑income portfolios. A pension plan worried about a flattening of the 5‑ to 10‑year curve can implement a FAN to offset potential shortfalls between liability and asset durations. Because futures require less upfront capital than cash transactions, FANs provide a cost‑effective tool for tactical rebalancing or to temporarily neutralize exposure while executing longer‑term cash trades.

• Short sentence: FANs are used to adjust relative maturity exposures quickly and cost‑efficiently.
• Example: a cash bond swap hedged synthetically with a FAN to maintain immunization target.

Arbitrage

Arbitrageurs monitor mispricings between the cash Treasury market and futures prices as well as between nearby and deferred futures months. FANs can be part of cross‑market arbitrage strategies where dealers exploit temporary basis dislocations arising from supply shocks (such as large Treasury auctions) or central bank operations. By pairing futures legs with offsetting cash positions, arbitrageurs can capture basis convergence while minimizing net duration exposure.

• Short sentence: FANs facilitate capture of cash/futures and inter‑maturity basis inefficiencies.
• Example: arbitrage between cash 5‑yr notes and futures while offsetting exposure in 10‑yr futures.

Practical note: execution of FANs for any of the above uses must account for transaction costs, tick‑to‑tick slippage, and the potential for margin calls during volatile market regimes. Research and data from providers such as Bloomberg, Reuters, and bank research desks at Goldman Sachs or J.P. Morgan often inform trade timing and sizing decisions. For traders seeking to learn execution fundamentals, educational resources such as the futures spreads primer on FuturesTradingPedia and step‑by‑step trading guides can be consulted: see articles on futures spreads and steps to trade futures for practical walkthroughs (futures spreads, how to get started).

Impact of five against note spread on the market

Market effects and systemic considerations

The five against note spread exerts measurable influence on market microstructure, liquidity, and price discovery within the U.S. Treasury complex. Because FANs concentrate on the 5‑ to 10‑year segment, heavy activity can shape intraday liquidity and affect the local basis between cash and futures. Dealers providing two‑sided markets in Treasury futures often internalize FAN flows to manage inventory and hedging costs, which in turn affects execution quality for end‑clients.

From a price‑discovery perspective, FANs help transmit information about expected future policy moves and term premium adjustments between cash and futures markets. For example, during episodes when central bank guidance alters expectations for medium‑term rates, FANs can amplify the speed of price convergence along the curve as relative value trades realign exposures.

• Liquidity: FAN trades add depth to spread markets, but liquidity can concentrate in specific expirations, creating uneven execution conditions for larger block orders.
• Volatility propagation: abrupt changes in the spread can increase localized volatility in the 5‑10 segment, potentially prompting brokers to widen intraday spreads or increase margin requirements.
• Price discovery: FANs help articulate market expectations about monetary policy risk and term premium, particularly when combined with data releases and auction results reported by media such as Bloomberg and Reuters.

Macro events and institutional behavior influence FAN market dynamics. Large Treasury issuance, shifts in bank balance sheet capacity, and regulatory drivers can cause spread movements that are not purely fundamentals‑driven. Agencies and rating agencies such as Fitch Ratings or analyses from S&P Global and Moody’s Analytics may indirectly impact FAN pricing by updating outlooks that change demand patterns for intermediate versus longer maturities.

Insight: because FANs interact with both cash and futures markets, they serve as transmission mechanisms for information and liquidity between dealer inventories and end‑investor allocations. Their presence can therefore stabilize or destabilize the local curve segment depending on prevailing market depth and the diversity of market participants. For traders, monitoring liquidity metrics and dealer balance sheet capacity—often reported in pieces by J.P. Morgan or Goldman Sachs research—is essential to anticipate periods of compressed or stretched spreads.

Benefits of five against note spread

Primary advantages for market participants

• Leverage and capital efficiency: Spread margin treatment typically requires lower initial capital than equivalent outright positions, enabling higher notional exposure for a given capital base.
• Focused relative value exposure: FANs isolate curve slope risk between 5‑ and 10‑year points without taking full duration exposure to the entire curve.
• Hedging flexibility: The spread can hedge basis and relative duration risks associated with cash bond portfolios or derivatives positions.
• Execution convenience: Single‑order spread functionality on exchanges reduces execution risk compared with executing two separate outright orders.
• Arbitrage opportunities: Efficient vehicle for capturing temporary mispricings between cash and futures and across expirations.

These benefits are widely recognized in exchange documentation and market commentary. For readers seeking deeper operational guidance, FuturesTradingPedia offers guides that explain spreads and margin mechanics (futures spreads explained) and the interaction with options margin and clearing referenced in educational material (options margin, options clearing).

Risks of five against note spread

Main hazards and operational cautions

• Amplified losses: Leverage inherent in futures can magnify losses if the relative move between legs goes against the trader’s position.
• Margin calls and liquidity squeezes: Sudden volatility can trigger margin increases and require fast capital, especially if dealer liquidity withdraws.
• Basis and roll risk: Cash/futures basis moves or adverse roll patterns across expiration months can erode expected spread profits.
• Correlation breakdown: Structural changes in interest‑rate regimes, such as unexpected policy shifts, can alter the historical relationship between 5‑ and 10‑year instruments.
• Execution risk: Large FAN orders in illiquid expirations face slippage and partial fills; single‑leg execution risks are material if spread functionality is not used.

Risk management best practices include stress testing P&L scenarios, maintaining margin buffers, and using limit orders or algorithmic execution to manage slippage. Brokers and clearing members may apply concentration or liquidity surcharges during stressed periods; traders should consult CME Group notices and their clearing brokers for up‑to‑date margin treatment. Additionally, monitoring research from market participants like Goldman Sachs, J.P. Morgan, and data vendors such as Bloomberg helps contextualize risk from macro shifts.

Brief History of five against note spread

Origin and evolution in futures markets

The concept of pairing intermediate and longer‑maturity Treasury futures to trade relative value traces to the broader development of Treasury futures liquidity in the late 20th century as exchanges standardized contracts. The explicit use of a five‑vs‑ten note spread became routine as the five‑year futures gained liquidity alongside the 10‑year, with dealers and arbitrageurs exploiting the contractual symmetry for relative value strategies.

Over time, exchange listing changes, enhancements in spread trading functionality at the CME Group, and growth in electronic matching contributed to wider adoption by active fixed‑income desks. Today, FANs form part of a family of inter‑maturity spreads—alongside calendar and butterfly spreads—used to flexibly express yield‑curve views.

• Key milestone: standardization and centralized clearing reduced counterparty risk, making FANs accessible to a broader set of institutional users.
• Key players: major banks and liquidity providers from the U.S. Treasury markets shaped market conventions and spread liquidity.

For practical reading and learning, consult applied guides on FuturesTradingPedia such as futures butterfly spreads, futures calendar spreads, and practical steps for trading futures to see how FANs relate to broader spread strategies: butterfly spreads, calendar spreads, and steps to get started.

How does settlement occur for FANs and what are practical execution considerations?

Futures settle per exchange rules; FANs are typically closed out before delivery. Execution considerations include selecting liquid expirations, using single‑order spread functionality, and modeling margin/stress outcomes in advance.

What are common exit strategies?

Traders commonly roll spreads to next‑month expirations, offset both legs simultaneously, or hedge via cash bonds depending on inventory and funding considerations.

Can FANs be used in cross‑instrument strategies?

Yes. FANs are often combined with swaps, options, or cash positions to implement more complex relative‑value or hedging programs; consult clearing and margin documentation for multi‑instrument treatment.

How to monitor market signals relevant to FANs?

Follow auction calendars, Fed communications, and data from providers such as Bloomberg, Reuters, and research notes from Goldman Sachs and J.P. Morgan to anticipate curve moves that affect FANs.

Where to find educational resources?

FuturesTradingPedia hosts practical articles on spreads and settlement (futures final settlement), and strategy pages for bull/bear spreads and bond‑spread variants such as the FAB spread (five‑against‑bond (FAB)).