KIC000078 - with a flattening of the yield curve...

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Yield Curve Strategies Historically, two types of nonparallel yield curve shifts have been observed: a twist in the slope of the yield curve and a change in the humpedness of the yield curve A flattening oftbe yield curve indicates that the yield spread between tbe yield on a long-term and a short-term Treasury has decreased; a steepening of the yield curve indicates that the yield spread between a long-term and a short-term Treasury has increased. The other type of nonparallel shift, a change in the humped ness of the yield curve, is referred to as a bulleifly shifi_ p"""'t-\::.'''' e, 1'.\11' MOOt1Ve ,liN, s"=,.,;,,,.,,.:',,o'"', . ...,,,,,.",.- ..,',.,. ."""'''~''''''"'''''"' ..... Yield Curve Strategies (continued) Frank Jones analyzed the types ofyieJd curve shifts that occurred between 1979 and 1990. He found that the three types of yield curve shifts are not independent, with the two most common types of yield curve shifts being I. a downward shift in the yield curve combined with a steepening of the yield curve II. an upward shift in the yield curve combined
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Unformatted text preview: with a flattening of the yield curve. Combinations of Yield Curve Shifts rr;:-""~~~~' ~, '~'a:f~~Q[ft/F?!l<:Qil'wt'!i!ttYJ? Bu~rfiy~ Yield Positive Butterfly----Maturity 3 Combinations of Yield Curve Shifts ~:;~~,SJ1,tf~~E&i~~aii[~~ Yield Maturity Three Hypothetical Treasury Securities Bullet vs Barbell Bullet is 100% in C, so a 100 bps change in yield at 10-year maturity brings dollar change of $6.434 per $100 Barbell is 50.2% in A and 49.8% in B. Dollar Duration of Barbell = .50211<4.004+.498*8.882 = 6.434 => Contribution to duration much higher at long end. Weighted convexity for Barbell is higher, so price is higher for same duration. Difference in yield is 25 bps so no change brings positive return for bullet. $0 what do we know about markets expectations about changes in yields given what they pay for convexity? 4...
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KIC000078 - with a flattening of the yield curve...

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