Curve Steepeners

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Permalink Reply by Razni Razak on March 11, 2010 at 6:29pm

Curve steepener strategy would bet on the fact that the interest rate environment would cause a further steepeining of the yield curve for example, short term yields would decreased followed by an increase in the long term yields and vice versa. In this example, given that short term yields are falling, prices of short term bonds are higher where as a decrease in yield of long term bonds would drive prices down. A trader using this strategy would bet that the yield curve would be steeper in the future. i.e in the future, his position in bonds would be that his short term bonds will be more expensive while his long term bonds are getting cheaper. Given this, his strategy today would be to go long on short maturity bonds and go short on the longer term ones.

Back to your question - why just short long term bonds? If you sell long term bonds today then you would be better off in the future when price of the long term bond has fallen. However, note that in future the price of short term bonds would also have risen due to the steepening of the curve. Given this, your strategy today would be to sell long term bonds and use the proceeds to buy short term bonds. This is with the anticipation that you would make a gain in the future when prices of short term bonds would have risen due to the steepening of the curve.

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Permalink Reply by Robert Donohue on March 12, 2010 at 4:02pm

Thank you.

Bob Donohue

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