Inter-bond spread
Also written Inter-bond pair spread
A long-short position in futures on two different GOI bonds, usually of the same expiry, taken to express a view on how the yield curve will steepen or flatten.
In plain language
A calendar spread keeps the bond the same and changes the month. An inter-bond spread keeps the month the same and changes the bond.
The workbook: an inter-bond pair spread is a long-short position in futures on different underlying GOI bonds. Both typically have the same expiry date. Its examples:
- buy 6.10% GOI 2031 futures and sell 5.85% GOI 2030 futures, both October expiry — two bonds in the 10-year maturity bucket; or
- buy 6.10% GOI 2031 futures and sell 7.27% GOI 2026 futures, both October expiry — a 10-year versus 5-year trade.
And its purpose: if a trader anticipates steepening or flattening of the yield curve, the trader may use an inter-bond spread strategy.
The trader is not betting on the general level of rates. He is betting on the relationship between two points on the curve, or between two bonds near the same point. What he earns or loses is the change in the difference between the two futures prices.
How it works
Spread basics. The workbook defines spread as the difference in prices of two futures or option contracts, and says a good understanding of that relationship and considerable knowledge of the particular bonds is needed to trade it.
The two workbook variants.
| Variant | Legs | What it trades |
|---|---|---|
| Same bucket | Long 6.10% GOI 2031, short 5.85% GOI 2030 | Relative value between two 10-year bonds |
| Across the curve | Long 6.10% GOI 2031, short 7.27% GOI 2026 | The 10-year versus 5-year part of the curve — steepening or flattening |
Linking it to curve moves. Chapter 1 teaches that bond prices move inversely to yields, and that a steepening or flattening is a change in the gap between long and short yields rather than a parallel shift. An inter-bond spread across maturities profits when the gap between the two futures prices moves the way the trader expected.
How it differs from a calendar spread in practice.
- The workbook's spread order book is described for calendar spread combinations (same contract, different months). An inter-bond pair is two separate orders, so execution risk between the legs applies.
- The calendar spread charge in Chapter 7 is defined for a futures position in one expiry month offset by a position in a different expiry month. The workbook does not extend that margin benefit to pairs on different bonds.
- The workbook's example simply pairs the two futures; it does not discuss weighting the legs. Chapter 5's duration-based hedge ratio is the tool it teaches elsewhere for matching price sensitivity between different bonds.
A worked example
A 10-year versus 5-year pair (prices and size illustrative). In October expiry futures, one lot = 2,000 bonds.
- Buy 10 lots of 6.10% GOI 2031 futures at 98.50.
- Sell 10 lots of 7.27% GOI 2026 futures at 103.00.
A fortnight later, long-end yields have fallen more than short-end yields — the curve has flattened. The 2031 future is at 99.10; the 2026 future is at 103.20.
| Leg | Entry | Exit | Per bond | × 20,000 bonds |
|---|---|---|---|---|
| Long 2031 | 98.50 | 99.10 | +0.60 | +₹12,000 |
| Short 2026 | 103.00 | 103.20 | −0.20 | −₹4,000 |
| Net | +0.40 | +₹8,000 |
Both bonds rose, so an outright short in the 2026 lost money. The pair still made ₹8,000 because the long-dated bond rose more.
The warning inside the numbers. Ten lots against ten lots is not a neutral position: the longer bond normally moves more for the same yield change. Part of that ₹8,000 could have come from a general fall in yields rather than from flattening. That is why the spread needs, as the workbook says, considerable knowledge of each bond.
Why NISM asks about it
Chapter 5 (Strategies using Interest Rate Derivatives), section 5.6 on trading spreads, defines the inter-bond spread straight after the calendar spread and gives both the same-bucket and the 10-year versus 5-year examples. Expect a question that asks which spread uses different underlying bonds with the same expiry, and what view it expresses — steepening or flattening of the yield curve.
Common exam traps
- Inter-bond = different bonds, same expiry. Calendar spread = same bond, different expiries.
- The view is on the shape of the yield curve (steepening or flattening), not on the direction of rates overall.
- A calendar spread carries only basis risk from the change in spread; an inter-bond pair also carries the difference between the two bonds.
- The spread order book is for calendar spread combinations; an inter-bond pair is placed as two orders and carries execution risk.
- The calendar spread charge is defined for offsetting positions in different expiry months, not for pairs on different bonds.
- Equal lots do not mean equal risk across maturities.
Check yourself
1.A horizontal spread involves options with which combination of features?
- a)Same strike and same type but different expiry
- b)Same expiry but different strike prices
- c)Different strikes and different expiries
- d)Different underlyings but the same expiry
Show the answer
Answer: (a) Same strike and same type but different expiry
"Horizontal spread involves same strike, same type but different expiry options. This is also known as time spread or calendar spread."
The other categories: vertical spreads use the same expiry but different strike prices; diagonal spreads use different expiries AND different strikes; and option (d) describes an inter-bond spread, which is a futures pair trade rather than an option spread.
⚠️ For both horizontal and diagonal spreads, it is not possible to draw a pay-off chart, because the expiries underlying the spread are different. The reasoning behind a horizontal spread is that the two options have different time values, and the trader believes the difference between them will shrink or widen.
2.A trader buys 6.10% GOI 2031 futures and sells 7.27% GOI 2026 futures, both of October expiry. What is this strategy called, and what view typically drives it?
- a)A calendar spread, driven by a view on the spread between near-month and mid-month contracts
- b)A regular arbitrage, driven by futures trading above their theoretical price
- c)An inter-bond spread, typically used when the trader anticipates a steepening or flattening of the yield curve
- d)A diagonal spread, driven by a view on the difference in time values
Show the answer
Answer: (c) An inter-bond spread, typically used when the trader anticipates a steepening or flattening of the yield curve
"An inter-bond pair spread is a long-short position in futures on different underlying GOI bonds. Both typically have the same expiry date." The workbook's example is this one — "buy 6.10% GOI bond 2031 futures and sell 7.27% GOI bond 2026 futures both of October expiry (10-yr bond vs 5-yr bond trading)." "Generally, if trader anticipates steepening or flattening of yield curve, trader may use inter-bond spread strategy."
- (a) A calendar spread uses the same underlying in different months. Here the underlyings differ and the expiry is the same.
- (b) Regular arbitrage pairs a bond in the cash market with futures on the same bond.
- (d) A diagonal spread is an options strategy with different strikes and expiries.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Calendar spread chargeThe reduced margin on offsetting positions in the same underlying across different expiries: 1.75% of the far-month contract for index derivatives, 2.2% for single stock derivatives.
- Calendar spread tradingTaking opposite positions in two maturities of the same currency futures (or options) contract to trade the change in the spread between them, rather than the direction of the currency.
- Spread order facilityAn exchange order type that trades a calendar spread as one order — priced as the difference between far and near months — so both legs execute together at once.
- Duration-based hedge ratioThe number of interest rate futures that drives a bond portfolio's duration to zero — portfolio modified duration times market value, divided by futures modified duration times futures price over par.
- Execution riskThe risk that a trade does not execute as planned — that prices move between the legs of a strategy, that one leg fails to fill, or that an order fills away from the desired price.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- Parallel shiftA change in the term structure in which all rates move in the same direction by the same extent, leaving the spread between short and long rates unchanged — the only kind of move duration handles well.
- Term structure of interest ratesInterest rate plotted against term — one curve per credit quality, with the risk-free curve as the base and every other borrower quoted as a spread over it.
- TwistA steepening or flattening of the yield curve in which short-term and long-term rates move in opposite directions — as distinct from a convexity change, where they move the same way by different amounts or one stays put.
- Buy spread orderAn exchange order type that trades a calendar spread as a single instruction: a buy spread order simultaneously sells the near-month leg and buys the far-month leg at the price difference quoted.
- Reference priceIn an exchange spread order, the last traded price of the near-month (first) leg — the anchor price to which the entered spread difference is added to fix the far-month leg's traded price.