Yield Curve Strategies The yield curve for U.S. Treasury securities shows the relationship between their maturities and yields. There are three yield curve strategies which investors can use: 1) Bullet strategies: In a bullet strategy, the bond portfolio is constructed with the maturities highly concentrated at one point on the yield curve. PDF zum Thema Kurzfrist-Trading-Strategien Als Trader handle ich diese Strategien schon durchgehend seit 2009. 0000007271 00000 n A level shift is called a parallel shift. Corey holds a Master of Science in Computational Finance from Carnegie Mellon University and a Bachelor of Science in Computer Science, cum laude, from Cornell University. 0000004052 00000 n J. 0000000716 00000 n CurveTrades believes that the yield curve spread sector offers a largely untapped asset class with global opportunities. Finally, time-series momentum appeared to offer no edge in timing curvature trades. Investors hope to achieve capital gains by employing this strategy. We find that the global curve carry factor has strong performance that cannot be explained by other factors. 10 Fixed Income Trading 163 10.1 Market directional bets 163 10.2 Yield curve bets: Steepeners and flatteners 165 10.3 Yield curve bets: Rising and falling curvature 167 10.4 Spread bets 169 10.5 Volatility bets 171 10.6 Summary 172 Notes 174 Appendix: Bullets, barbells, and butterflies 175 The annualized arithmetic return of the strategy is 6,04% Premium PDF Package. This caused significantly more directional movement in the 2-year rate than the 10-year rate. ECB Working Paper Series No 2149 / May 2018 1. 0000008564 00000 n As before, we will evaluate lookback horizons ranging from 21-to-294 trading days (approximately 1-to-14 months) and assuming a 21-trading-day holding period, implemented with 21 overlapping portfolios. There are two common explanations for upward sloping yield curves. We had an easing cycle during the dot-com bust, a tightening cycle during the subsequent economic expansion, and another easing cycle during the 2008 crisis. One of the easiest and time tested strategies for making money investing in bonds is called rolling down the yield curve. A hedgers-to-speculators risk transfer in fixed income futures markets would be obscured if agents choose to hedge their interest rate risk with other strategies (i.e. Conversely, if the 10-year rate moves more than the 2-year rate, we end up in a scenario of positive correlation, since both strategies are long the 10-year. Market shocks, monetary policy, and preferences of different segments of investors (e,g. Consider a yield curve across Dec ‘09 and Dec ’10 contracts priced at 98.45 (1.55%) and 97.55 (2.45%) The SPREAD is 0.90 or 90 basis points - positive Trader expects no more rate cuts but sees cash lower Followed by more aggressive rate rising cycle than the market Sees Dec ‘09 rising to 99.25 (0.75%) A level change occurs when rates increase or decrease across the entire curve at once. For example, –Slope– appears to exhibit significant trends from 2000-2004, 2004-to 2007, and 2007-2012. u. Finally, to capture curvature change we will construct a butterfly trade where we short the 2- and 10-year UST futures and go long the 5-year UST futures. Unless adjusted, the volatility exhibited across these trades will be meaningfully different. 4. The allocation graph appears to suggest that results are not merely the byproduct of consistently being long or short a particular portfolio and the total return level appears to suggest that the portfolio is able to simultaneously profit from both legs. For example, most of the bonds in the portfolio will mature in 10 years. Time-series momentum appears to generate positive returns for the Level portfolio. The returns of the strategy also do not offer a materially improved Sharpe ratio or drawdown profile. Yield Curve Accessing capital markets The pricing of debt instruments revolves around the yield curve. A strategy that is employed by many such participants is “the flattening trade” For many active market participants, successful bond trading is not merely picking a point along the yield curve, and speculating whether interest rates will go up or down, but rather to speculate on the shape and slope of the yield curve. For example, each month we can rank the portfolios based upon their prior returns. pensions may prefer the far end of the curve for liability hedging purposes). always so for bonds trading above or equal to par. Today, how-ever, they are one of the key decision factors in buying and selling energy (be this power, gas, oil or coal), and even in investment decisions. Assuming Yield Curve is upward sloping Parallel Shift in the yield curve Upward Shift in The Yield Curve Bullet Strategy with Short Duration Bonds. Learn about Central Banks and their influence on the curve. 0000003473 00000 n 0000002244 00000 n A slope change occurs when short-term rates decrease (increase) while long-term rates increase (decrease). To capture a level shift in the curve, we will go long across all the contracts. The front end of the curve ( 10-02 ) looks very similar to past pre-recession eras game in itself. 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