While many investors monitor yield curve shifts for informational purposes, some go one step further and aim to profit from their expectations for changes in the shape of the yield curve. For example, if an investor does not have a clear view on the overall direction of yields, whether they'll go up or down in the next few weeks, but they believe the yield curve is going to steepen or flatten, they might enter into a curve trade. A pure curve trade is designed to have minimal exposure to overall increases or decreases in yield levels. I.e. a parallel shift of the curve, but instead it aims to profit from an expected change in the shape of the yield curve. Let's start by looking at steepening and flattening trades. A steepening trade, or simply a steeper, benefits from an expected increase in the yield differential between two maturities. For example, if an investor expects the curve to steepen, let's say the 2s10s spread to rise, they would enter two positions, a long position in one maturity and a short position in another. For example, in a steepener in a trade using bonds, the investor would sell 10 year bonds short to benefit from rising 10 year yields. However, this alone would give them directional exposure, which was not the aim in this case. To balance this, they would also take a long position in two year bonds, which allows them to profit from falling two year yields. If the yield curve then moves up in parallel with both two year and 10 year yields rising, the investor would gain on their 10 year short position but lose on the two year long position or vice versa. This neutrality means the gains and losses from parallel yield curve shifts would cancel each other out as the trade is not designed to profit from this movement in the yield curve, but rather from a steepening of the curve. The key point is that for the trade to be profitable, all that needs to happen is for the 10 year yield to increase relative to the two year yield. This steepening could happen in various ways. For example, the 10 year yield could rise while the two year yield remains steady or falls, or the two year yield could fall while the 10 year yield stays the same. However, if the 10 year yield fell by a smaller amount than the two year yield when they both decreased, or the 10 year yield rose by a larger amount than the two year yield, when they both increased the relative difference between the two, which still increase under either scenario. Which leads to a gain for a steepening trade. Another point worth noting is that typically a curve trade is designed to be overall duration neutral, to ensure the potential profits and losses from a parallel shift cancel each other out. Because shorter term bonds tend to have lower duration, investors typically need to trade a higher notional amount in two year bonds than in 10 year bonds to balance the duration exposure.

A flattening trade follows the same logic, but with the positions reversed in a flattener, the investor would short two year bonds to benefit from rising short-term yields and go long on 10 year bonds to benefit from falling long-term yields. The investor would then profit from a reduction in the yield spread between the two maturities.

As mentioned, these types of trades are usually constructed to be duration neutral, meaning they are designed to be indifferent to an overall shift in yields. The trade only gains or losers based on changes in the shape of the yield curve rather than from the absolute level of yields. However, some investors may incorporate a more directional view into their curve trade. For instance, an investor could overweight their long position if they also expect yields to fall overall, combining both a curve trade and an outright yield view in the same strategy.