Intro to the yield curve

Discussion in 'Financial Futures' started by maninjapan, Apr 20, 2010.

  1. I know, I know, your "stuff" is so much more dignified and erudite than mine. :p
    #11     Apr 20, 2010
  2. Hahaha, nazz, I wasn't trying to be an arrogant prick, honest... It's just that, having been the wrong way on this trade in 2008, I have had time to do a lot of soul-searching. As a result, I feel very strongly about it, as the wound is still so very fresh.
    #12     Apr 20, 2010
  3. Well, it's a form of risk aversion, I guess. Point is that a pension manager's mandate requires them to hedge the interest rate exposure of some, if not a majority, of their liabilities. Hence, the ALM bid for long-dated duration, whether in cash bonds or derivatives, such as swaps/swaptions.

    In general, as I said, this is much more evident in EUR and GBP than USD, where some of the flatness is due to all sorts of structured notes malarkey happening (PRDCs and their ilk). The dynamics in JPY are very similar, but the effect is very different, 'cause the whole curve is weird.
    #13     Apr 20, 2010
  4. Let me pour some Johnnie Walker Black Label onto it instead of J.W. Gold Label. :)
    #14     Apr 20, 2010
  5. You're sweetness itself, truly...
    #15     Apr 20, 2010
  6. sjfan


    Another point to consider - bond managers usually hedge their corporate bond and mortgage purchases by selling treasuries at the matched duration point. They don't actually have to short sell (most of the time), but either through selling the naturally existing inventory of treasuries they are holding or through futures. A lot of corporate bonds are issued at the 10y point (rather than the 30s) and bond managers have been buying A LOT of corporate bonds in the last quarter or two, so the net effect is the 10y being sold into the market to make room for those corps, driving yields higher.

    #16     Apr 20, 2010
  7. And another point to consider that is particularly relevant to the US mkt is the convexity needs of the mtge community (they used to use participate mainly in the 10y area). Obviously, things have been changing a lot in that space, so it's not entirely clear how that dynamic will evolve.
    #17     Apr 21, 2010
  8. Is this because we are missing Countrywide and WAMU in the market place ? :D
    #18     Apr 21, 2010
  9. I don't know about "we". I ain't exactly missing them...

    It's just because the Fed owns all the mtges and doesn't give a rat's ass about hedging convexity.
    #19     Apr 21, 2010
  10. The yield difference between 2- and 10-year notes, also known as the yield curve, narrowed 0.02 percentage point to 2.79 percentage points this week. The spread reached a record 2.94 points on Feb. 18....I am sort of short the spread...
    #20     Apr 21, 2010