How to duration weight my trade

Discussion in 'Stocks' started by Chronos.Phenomena, Apr 5, 2011.

  1. I'm new to interest rate trading. What I want to do is to bet on short term interest rate increase and on long terms interest rate decerase. I spoke to a guy who is more expirienced and he said thT it's very important to duration weight both sides of may trade? What does that mean and how to do it in excel?

  2. sle


    For starters, what instruments are you trading, bond index ETFs?
  3. sle


    So, duration is the sensetivity of a bond to change in the interest rate. If you have duration-weighted your spread, that means that you are neutral to the paralell shift in yields (e.g. if both 2y and 30y yields move 5 bps) and only sensetive to relative changes (if 2y moves more or less then 30y).

    The"right" way would be to do the following steps:
    (a) go to the iShares web site and download the current index constituents with weights
    (b) calculate duration (there is a function in Excel for it, DURATION) of each bond in the ETF and multiply it by the weights
    (c) trade an appropriate ratio based on the above calculation
    (d) marvel at how anal and precise your trading process is

    Or you could go the short way, which is assume that maturity of TLTL is approximately 25 years, maturity of SHY is approximately 2 years and thus, durations would be around 18 and 1.8 respectively. You just want to size the in such way that
    Duration 2y * size SHY = Duration 25y * size TLT
    which is this case approximately $1 TLT for each $10 SHY