Curve Trading Basics

Discussion in 'Financial Futures' started by trojan, Sep 25, 2013.

  1. trojan


    I am trading short end of the curve for a while. I want to learn about the different curve trades in the long end and the swaps market. I was going through various trade reports. i have a few queries related to it.

    1) what is ASW?

    2) I read few trades in swaps.
    a) "receive eur 5y5y/5y10y/5y15y forwards"
    b) pay GBP 1y3y fwds / 1y4y fwd spread
    what does that mean?

    3) how can i trade 2 yr treasury with OIS ?

    4) what is a 5y5y breakeven rate?

    5) short 5y5y real rate?

    6) 2s3s5s payer fly widener?

    7) how can i trade 2s 5s 10s US curve fly ? I can take the positions in tsy futures. how should i watch the prices in yield terms or price terms ?

    8) receive 3y1y vs 1y 5y ?

    I would highly appreciate any replies.

  2. 1) ASW is an abbreviation for "asset swap". Simplistically, an asset swap transaction is where you buy/sell an asset (such as govt bond), hedged with a derivative (such as an interest rate swap).

    2) These are trades that are done using forward-starting swap. For instance, 5y5y refers to a 5y swap that starts in 5 years. The expressions you have heard most likely refer to butterflies or curve spread trades. For instance, "pay GBP 1y3y fwds / 1y4y fwd spread" means a spread trade where one receives fixed on the 1y3y swap and pays fixed on the 1y4y swap, in equal DV01 amounts.

    3) I don't know how YOU can trade 2y UST with OIS. People would trade it by buying/selling 2y UST against paying/receiving fixed on 2y OIS, in equal DV01 amounts. This would be an example of an asset swap trade.

    4) 5y5y breakeven rate is shorthand for "5y5y breakeven inflation rate". It's a little tedious to explain how it's constructed, but if you need the details, I can help. It's a rate that central bankers pay attention to, since it offers insight into the mkt's expectations of future inflation.

    5) 5y5y real rate is a 5y real rate in 5 years time. It's calculated from the mkt yields of TIPS.

    6) "2s3s5s payer fly widener" is a swaption trade, where you probably buy 3y payers vs 2s and 5s. It's not clear as you need to know the expiry and "widener" is not a term I'd use in this context.

    7) You should do whatever makes it easier for you to connect the movements of the mkt into PNL. And you need to be aware that, by trading the ZT/ZF/ZN fly, you'll be trading the 2s5s7s fly, not 2s5s10s.

    8) 3y1y vs 1y5y, see above.
  3. Mandrykk


    Good questions! I take it you're new to trading and looking for some answers? Are you currently trading or do you want to be a curve trader?