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Old 12-20-2010, 01:16 PM   #1 (permalink)
 
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What is a curve steepener trade and what is a curve flattener trade?


Seeking direct and precise answers for the following questions . Appreciate it if help is given

1 ) What is a curve steepener trade?

I think its got to do with the spreads of the back end over the front end widening , so the trade is basically short the back end and long the front end ( if the front end ' s yield fall faster then the back end ) or long the back end and short the front end ( if the back end ' s yield fall faster than the front end ). So its not a directional trade but rather a specific trade that aims to exploit the different reactions in the yield curve when interest rates shift big time .

Can it also be for rising rates ? Where the rate of increase in yield is different for parts of the curve ? What kind of market conditions would we see these type of trades profit alot ?


2 ) What is a curve flatterner trade?

Basically opposite to a steepener . Again answer what i inquired about for the former trade .


Please and thankyou !!!

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Old 12-20-2010, 03:56 PM   #2 (permalink)
 
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Quote:
Originally Posted by forexer View Post
Seeking direct and precise answers for the following questions . Appreciate it if help is given

1 ) What is a curve steepener trade?

I think its got to do with the spreads of the back end over the front end widening , so the trade is basically short the back end and long the front end ( if the front end ' s yield fall faster then the back end ) or long the back end and short the front end ( if the back end ' s yield fall faster than the front end ). So its not a directional trade but rather a specific trade that aims to exploit the different reactions in the yield curve when interest rates shift big time .

Can it also be for rising rates ? Where the rate of increase in yield is different for parts of the curve ? What kind of market conditions would we see these type of trades profit alot ?


2 ) What is a curve flatterner trade?

Basically opposite to a steepener . Again answer what i inquired about for the former trade .


Please and thankyou !!!
I dont know much about this but :

Curve Steepener Trade Definition

Hope that starts you off .

Graeme
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Old 12-20-2010, 10:44 PM   #3 (permalink)
 
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Thanks Graeme . Anyone else ???
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Old 12-21-2010, 10:56 AM   #4 (permalink)
 
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You ' ve pretty much got it down pat . I don ' t see why rising rates or falling rates would make a difference . The & quot ; bet & quot ; in this kind of trade is on the change in the REACTION of the yield curve and not on the yield itself .
I don ' t think its a matter of market conditions . This kind of trade is very quanititive , that is , the yield curve can be modeled ( relatively ) very precisely as can expected changes to it . So this kind of trade is more about having the right parameters for the trade , and less about general market conditions .
Spevifically , being short one asset and long a very similar asset is supposed to leave you & quot ; market neutral & quot ;.
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Old 12-21-2010, 11:16 PM   #5 (permalink)
 
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Thanks Tal ! I was told that the front end was more affected by interest rate movements ( where we would see alot of changes during expansionary and contractionary monetary policy ) while the back end was more affected by market conditions ( the supply and real supply and demand of money ).

For instance during the dot com burst in 2000 , bull curve steepner trades were ridiculed because they herd and the media thought that when the fed slashed rates , the back end would rally more . That turned out to be the case for the first few weeks but then the front end ' s yield started tanking much faster than the back end ' s . Can you explain why this happened ? I don ' t know about the price change gap between the 2 year and the 10 year then because the DV1 then is unknown to me .

What was the dynamics that caused the 2 year yield to fall faster and harder then the 10 year yield ?
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Old 12-22-2010, 05:52 AM   #6 (permalink)
 
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To awnser you briefly , I don ' t know .
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Old 12-22-2010, 06:12 AM   #7 (permalink)
 
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brief enough Anyone else ??? @ days and like 2 people commented ? Seriously ?
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Old 12-22-2010, 07:55 AM   #8 (permalink)
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i ' m assuming most folks don ' t know .... at least i don ' t know much about curve steepening .
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Old 12-22-2010, 11:57 PM   #9 (permalink)
 
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Here is a good explanation about a few different bond plays
http://www.investment-analytics.com/...ld%20Curve.pdf
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Old 12-23-2010, 01:25 AM   #10 (permalink)
 
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Damn Tal , overkill ! I feel so like a noob after glancing thru . Did you understand the whole thing ?
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