Intro to the yield curve
- Thread starter maninjapan
- Start date
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.Quote from nazzdack:
I know, I know, your "stuff" is so much more dignified and erudite than mine.
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.
You're sweetness itself, truly...Quote from nazzdack:
Let me pour some Johnnie Walker Black Label onto it instead of J.W. Gold Label.
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.
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.
Is this because we are missing Countrywide and WAMU in the market place ?
I don't know about "we". I ain't exactly missing them...Quote from ASusilovic:
Is this because we are missing Countrywide and WAMU in the market place ?
It's just because the Fed owns all the mtges and doesn't give a rat's ass about hedging convexity.
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...