Note Against Bond Spread (NOB)

A note against bond spread (NOB) is a pairs trade created by taking offsetting positions in 30-year Treasury bond futures with positions in 10-year Treasury notes. 

NOB is also known as the note over bond spread. 

The note against bond spread (NOB) allows investors to bet on expected changes in the yield curve, or the difference between long-term rates and short-term rates, over time.

Watching the NOB spread over time also provides a picture of where investors think longer-term market yields and the yield curve may be headed.

A note against bond spread (NOB) depends on the steepness or flatness of the yield curve. The curve steepens when long-term rates rise more than short-term rates. This happens in most normal market conditions in which the economy is expanding and investors are willing to take longer-term risks. 

Conversely, a flatten of the yield curve, or a yield curve inversion, happens when investors become more risk-averse, or when the economy is contracting.

Yields move inversely to bond prices. So, for example, weaker bond pricing results in bond issuers offering more in yield to compensate for the decease in market demand. Stronger bond pricing results in lower yields, because demand is high and investors require less compensation in interest to buy bonds.

If an investor expects the yield curve to flatten, they will put on a note against bond spread that's long the 30-year bond and short the 10-year note, attempting to take advantage of relatively higher prices for the longer-term bonds. If an investor expects the yield curve to widen, they will put on a note against bond spread that's short the 30-year bond and long the 10-year note, attempting to take advantage of relatively lower prices for the longer-term bonds.  

The Chicago Mercantile Exchange (CME) regularly lists a ratio of how many contracts are needed to put on a NOB spread trade. A ratio of 2:1 suggests it takes two 10-year note contracts for each 30-year bond contract to put on the trade. 

It's also interesting to watch the NOB spread to get a sense where investors believe interest rates are headed. If investors overwhelmingly are going short the 30-year bond and long the 10-year note, it's an indication they think longer-term market interest rates will rise. Conversely, if investors overwhelmingly are going long the 30-year bond and short the 10-year note, it reflects their belief that loner-term market interest rates will fall.