forexer

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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TheRagsToRichesStory

I dont know much about this but:

Curve Steepener Trade Definition

Hope that starts you off.

Graeme

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forexer

Thanks Graeme. Anyone else???

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talolard

You've pretty much got it down pat. I don't see why rising rates or falling rates would make a difference. The "bet" 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 "market neutral".

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forexer

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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talolard

To awnser you briefly, I don't know.

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forexer

brief enough Anyone else??? @ days and like 2 people commented? Seriously?

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Simit Patel

i'm assuming most folks don't know....at least i don't know much about curve steepening.

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talolard

Here is a good explanation about a few different bond plays
http://www.investment-analytics.com/...ld%20Curve.pdf

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forexer

Damn Tal, overkill! I feel so like a noob after glancing thru. Did you understand the whole thing?

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