# Block 009 — Curve trade mechanics — steepener/flattener asymmetry

**Status:** ✓ done (2026-07-02, Session 13)
**Phase:** Phase 1 (Rates)
**v2 marker:** Re-run after Process foundations (Blocks 00a/00b). Originally opened 2026-06-30; partial session 9 captured below; dialogue block deferred until rubric is taught. Block 00c (drawdown protocol) was withdrawn 2026-07-02 — the per-trade stop + weekly review framework in `risk-framework.md` v0.3 is the active state, no separate block teaches it.

## Topic scope

When steepeners vs flatteners pay. The asymmetry of curve trades. Why steepeners carry differently than flatteners. DV01-neutral construction. Two-leg vs three-leg (butterfly) trades. Carry-and-rolldown on different curve shapes (upward-sloping, flat, inverted, humped).

**Prerequisite:** Block 00a (pre-trade thesis rubric), Block 00b (anti-patterns). The dialogue block applies the rubric to curve-trade construction — that requires the rubric to be taught first.

## Carry-forward from Block 008 (2026-06-27)

- **Curve trade mechanics asymmetry** — Block 008 covered the basic steepener/flattener carry-and-rolldown asymmetry briefly (Q3); Block 009 deepens it across different curve shapes.
- **Trade-construction rubric** — when is negative carry justified (high conviction regime call) vs structurally bad (paying theta, curve too steep to start). Preview in Block 008; deep rubric work is Block 086 (Phase 5), not Block 009. *Updated 2026-06-30: rubric teaching is Blocks 00a/00b/00c, scheduled at the START of Phase 1. Block 086 is verification + edge cases.*
- **Carry-and-rolldown numerical fluency** — Block 008 used 2y 4.24 / 10y 4.51 (27bp spread). Block 009 should run reps on different shapes: flat curve, inverted curve, humped curve.

## Plan (v2 — to be run after Blocks 00a/00b/00c)

### Pre-read (added at Session 8 close)

- Litterman-Scheinkman (1991) "Understanding the Yield Curve" — full paper re-read for curve-trade mechanics (steepener/flattener asymmetry on different curve shapes) (~15 min, thematic)
- Ilmanen "Expected Returns" Chapter 13: Currency carry (pages 271-291) — cross-asset carry framework, §13.5 "carry here, carry there, carry everywhere" bridge to rates carry (~10 min, thematic)
- Tagged: [thematic, 25 min] — orientation; will be taught in session via TEACH+PROBE

### Block structure (60 min)

- **00-05: Pre-block probes**
  - Anki retention check (Block 008 cards: 10y zero-coupon trap, rolldown definition, steepener rolldown signs, asymmetry framework, DV01 sizing, dovish-pivot trade)
  - Cold recall: 8-section rubric (per Block 00a) — quick 30-second walk-through
  - Carry-forward re-probe: Taper Tantrum PC3-emergence causal mechanism (if user brings it up; otherwise skip)
- **05-25: Main material — Carry-and-rolldown across curve shapes**
  - Steepener carry on upward-sloping curve (covered Block 008; quick recap + correct any drift)
  - Steepener carry on FLAT curve (rolldown ≈ 0; pure coupon carry; pure view trade)
  - Steepener carry on INVERTED curve (rolldown sign flip; structural trade changes)
  - Steepener carry on HUMPED curve (rolldown sign depends on which side of the hump the leg sits)
  - Numerical reps: given 3 different curve shapes, compute carry-and-rolldown for both steepener and flattener
- **25-45: Dialogue — Trade-construction in rates terms (now rubric-driven)**
  - Given a curve shape + a view, walk through: (a) trade selection, (b) DV01-neutral sizing, (c) carry-and-rolldown profile, (d) view-conviction calibration (steepener vs flattener — when does negative carry get paid for a high-conviction view vs when is it structurally bad), (e) invalidation scenarios (regime-shift, catalyst surprise, two-trigger)
  - Apply the 8-section rubric (per Block 00a) to construct the trade thesis end-to-end
  - Apply the 200bp per-trade risk band (per `risk-framework.md` v0.3) to size the position
  - Two-leg vs butterfly: when does butterfly make sense (PC3 present, structural kinks, view on belly specifically)
- **45-60: Anki + log + carry-forward to Block 010**
  - 3-5 cards: curve-shape × trade-direction table (upward/flat/inverted/humped × steepener/flattener/butterfly), butterfly rationale (when does PC3 actually drive the trade), view-conviction calibration for negative-carry trades (when is -13bp/quarter worth paying)
  - **NOTE:** do NOT generate a "trade-construction rubric" card here — that's Block 00a + 086 / Phase 5 Process material.
  - Update competence-map (Rates — curve trade mechanics, NEW)
  - Carry-forward to Block 010 (yield vol + swaption surface)

### Pass criteria (mentor rubric only — NOT in probe prompts)

Per the 2026-06-26 Session 7 probe-format rule, pass criteria stay in the mentor's evaluation rubric. Probe prompts contain only the question.

## Session history

### 2026-06-30 — Session 9 (partial, then deferred)

**Pre-block probes:** 5 Anki retention checks. Q3 surfaced a Block 008 correction error: the prior session taught "long 2y leg has NEGATIVE rolldown" which is the *inverted-curve* case. On the upward-sloping curve (2y 4.24, 10y 4.51), the long 2y leg actually has POSITIVE rolldown (1.75y point is below 2y on the rising curve). Net trade is DV01-negative because short 10y's leg loss dominates by ~4.5x duration — NOT because both legs are negative.

**Patches applied:** Anki card 1782552515987 (Cloze "both legs negative") deleted; new card 1782818841968 (Basic "long 2y POSITIVE, short 10y NEGATIVE, net DV01-negative") created. Block 008 file + session log updated with re-correction note. Verification: 18/18 PASS on `/tmp/hermes-verify-block008-q2-correction.py`.

**Main material (curve shapes):** Taught carry/rolldown on flat, inverted, humped curves. User landed curve-shape mechanism (rolldown sign depends on local curve direction).

**Numerical rep (humped curve, butterfly):** Q1 trade structure: long belly / short wings — correct structure (2x/1x/1x), but the justification was wrong on three counts (collapsed direction with shape, said "10y rallies more than the wing" which is incoherent, treated Fed cut as the *mechanism* rather than the *trigger*). Re-probed once — user landed at Working on the curve-shape framing ("belly at peak, wings at troughs; Fed cut compresses peak toward troughs; butterfly captures differential") but with grammar issues. Q2 DV01 sizing: right structure, off by 2x in face ratio (used 2x 5y denominator when 1x is correct).

**Dialogue block — DEFERRED.** Block 009's dialogue was originally written with a "Trade-construction rubric" section asking the user to walk through all 8 sections of the pre-trade thesis. User pushback: "is now really the time to look at the process? I thought we had a clear block plan and were currently in rates. I also feel like we haven't done the teaching for the Process sections so to test it is preemptive." User further: "change the assumption that I already know the full investment process. This should be part of the learning material like any other topic, add blocks if needed where appropriate."

**Restructure decision:** Insert Process-foundations blocks (00a: rubric, 00b: anti-patterns) at the START of Phase 1. Block 00c (drawdown protocol) was inserted 2026-06-30 alongside 00a/00b but withdrawn 2026-07-02 when the drawdown protocol was removed from `risk-framework.md` entirely (per-trade stop is the discipline; weekly review is the drift catch). Sequence: 00a → 00b → 009 (re-run) → 010 → ... → 022.

**Pre-block prerequisite updated:** Block 009 now requires Block 00a (rubric) + Block 00b (anti-patterns). Block 009 dialogue can only run with both taught.

**Status transition:** ● current → ○ queued (re-run scheduled). Re-run will be quick (user statement: "if I remember most of the material it should be quick") and focuses on applying the rubric to the trade-construction exercise.

**Net session 9 work preserved:** Block 008 correction patches (real fix), curve-shape carry/rolldown material delivered and drilled once, Block 009 plan restructured with prerequisite line and "v2 re-run" marker.

## Carry-forward to next block

### Inherited from Block 00c / Session 12 (Block 00c withdrawn 2026-07-02)

Three trade-specific items were raised in Session 12 and parked in Block 00c. They moved to Block 009 because Block 009's dialogue block is the rubric-applied-to-live-trades exercise, which is exactly what these need. Re-run of Block 009 will walk through all three.

- **SLV-S reframe decision** (dispersion / combined-leg / close) — needed before Block 009 closes so the open-risk figure going into the rubric exercise is correct. Three reframe options documented in Session 11 anchor walk: dispersion trade (GC long / SLV short), combined-leg position with single invalidation, or close SLV.
- **GC-S pricing-gap articulation** (TIPS + DXY, Y > X test) — gold trade upgrade-or-document decision. If the pricing gap can be articulated, gold trade gets live-thesis upgrade; if not, trade remains a "view that happened to work" in management log.
- **QQQ-S rubric rewrite** — pre-process artifact (Block 00a not yet taught at entry); no anti-pattern stamp. Rewrite is process-upgrade not remediation. Forward action: rewrite trade doc with rubric when Block 009 closes.

### Order of resolution (recommended for Block 009 re-run)

1. SLV-S first (open-risk impact — affects every other rubric walk)
2. GC-S second (carry-forwards from Session 11 anchor walk)
3. QQQ-S last (deferred rewrite, lowest urgency)

### 2026-07-02 — Session 13 (Block 009 re-run, complete)

**Pre-block hygiene:** Pointer at Block 009 from Session 12 close. Pre-reads confirmed (Litterman-Scheinkman 1991 + Ilmanen "Expected Returns" Ch. 13). No stale `_session-state/` files. v0.3 risk-framework confirmed.

**Pre-block probes (4 total, plain text, no countdown):**
- Q1 (carry sign on upward-sloping 2s10s): Working+ — long 2y positive rolldown, short 10y negative rolldown, net negative due to duration.
- Q2 (carry sign on inverted 2s10s): Working+ — both signs flip, net switches to positive. Curve-shape terminology clarified: "inverted" = monotonic fall; "humped" = non-monotonic with local max.
- Q3 (2s5s10s butterfly on humped curve): Working+ (after re-probe) — initially mis-stated all 3 legs as positive rolldown. Re-derived: short 2y and short 10y legs are negative rolldown, long 5y leg is positive rolldown (4.75y below 5y peak). Net negative due to short 10y duration dominance. Butterfly is attractive on humped curve because structure isolates PC3 (curvature) trade, not because of positive carry.
- Q4 (negative-carry trade selection): Strong — articulated the operating rule: don't adjust the stop for negative carry. Stop set by technical invalidation level. Position size sized so bp-risk-at-stop = 200bp. Negative carry is a known cost, journaled as expected-value input, not a stop trigger.

**Main material:** Curve-shape carry/rolldown synthesis. The asymmetry of steepeners vs flatteners is a *curve-shape dependency of the carry sign*, not a fixed property of trade direction. On monotonic curves, rolldown sign is determined by which side of the trade is "down the curve" from the peak. On humped curves, the butterfly uniquely has a clear rolldown direction (every leg below the peak) and is the structure for trading PC3.

**Dialogue (3 carry-forwards from Session 12, walked in order):**
- **SLV-S reframe:** Decision = keep both GC and SLV; SLV is conscious tag-along on GC (anti-pattern #5 acknowledged, not remediated). 2-per-theme cap is *full* on precious metals. Both are pre-process / pre-framework legacy trades.
- **GC-S pricing-gap articulation:** Reframed as relationship mean-reversion thesis (mean-reversion of 2025 gold-real-yield decoupling). Y > X is on the *size* of the move, not the direction. Two-trigger: (1) gold-real-yield correlation re-establishes in -0.6 to -0.8 band, (2) DXY continues uptrend. Invalidation: the 2025 decoupling reasserts.
- **QQQ-S rubric rewrite:** Leave at 250bp as pre-process artifact. Technical-fact override to invalidation rule approved. Position is technical-driven (QQQ downtrend failure with failed attempts at new high), not macro-driven.

**Framework v0.3 → v0.4 updates:**
- New §1.1 "Invalidation form": macro fact default, technical-fact override allowed with `type: technical` tag in thesis + one-line justification. Mixed thesis: both must fail.
- `primary-driver` field added to thesis frontmatter (one of `macro` / `technical` / `hybrid`).
- §6 checklist updated to reference §1.1.
- Thesis template `_templates/thesis.md` updated to v0.4 (frontmatter, §1, §4, §5, §9 all aligned with v0.4 framework).

**Anki cards generated (Session 13):** 7 atomic cards on curve-shape carry/rolldown + framework v0.3/v0.4 rules. Pushed via AnkiConnect (port 6565) to `Macro Study::Phase 1 — Components::Rates`. Tags: `curve-shape carry-rolldown block-009 session-13`. Note IDs: 1783027415578 → 1783027416257. Atomic breakdown:
- 1, 2: rolldown sign on upward-sloping curve (long leg, short leg)
- 3: rolldown sign flip on inverted curve
- 4: long 5y on humped curve (specific worked example)
- 5: humped vs inverted terminology
- 6: v0.3 framework invalidation default + technical override
- 7: negative carry trade — operating rule

**Process changes filed:**
- v0.4 framework update (invalidation-type rule, primary-driver field)
- Thesis template v0.4 sync

**Status transitions:**
- **Process — curve trade mechanics (carry/rolldown):** NEW Weak → Working (reached in-session; re-probe at block 015 W27 verification or earlier if errors surface)
- **Process — invalidation form rule:** NEW Working (codified in v0.4 framework; re-probe Block 015)

**Carry-forward to next block:**
- **Block 010 — yield vol + swaption surface.** Prerequisite: Block 00a/00b (no change from before; Block 00c no longer applies).
- **Open practice items (not block content):**
  - Write thesis.md for GC-S, SLV-S, QQQ-S using the v0.4 template + primary-driver tag (operational, not a study block)
  - First weekly-review.md instance (Friday close, using new template) — operational, not a study block

**Pointer:** `_meta/current-block.md` updated at end of session. Block 009 → done. Block 010 opens.