TUT Spread

TUT stands for Ten Under Two referring to the 10-Year under 2-Year Treasury yield curve spread.

Trading the TUT Spread: Capitalizing on Changes in the Yield Curve

U.S. Treasury futures provide cost-effective and efficient means of capitalizing on anticipated changes in the shape of the yield curve. For example, recent upheaval in the slope of the Treasury yield curve suggests there may be opportunities to trade the TUT (10-Year under 2-Year) spread, using 2-Year and 10-Year U.S. Treasury Note futures contracts.

The 2-year to 10-year segment of the on-the-run U.S. Treasury yield curve has steepened sharply. From December 31, 2007 to February 15, 2008, the spread between the cheapest-to-deliver (CTD) 2-year and 10-year notes widened by nearly 70 basis points. With the Fed expressing determination to continue lowering its fed funds target rate for the foreseeable future, and with the U.S. federal deficit seeming to grow with each new report, some analysts have been calling for continued yield curve steepening.

The deep liquidity of the U.S. Treasury futures markets means you can capitalize on your yield curve expectations quickly and for relatively low transaction costs. And importantly, should your outlook change, you can reverse a TUT spread as easily and cost-effectively as you can initiate it.