Believe that the yield curve is going to steepen very soon. It may be fall in short-term rates, a rise in long-term rates, or some combination of these. What strategy should we pursue in the bond market to position ourselves to profit from our beliefs?
1 Answer
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Translate your forecast of yields into a forecast of bond prices: you believe long term bonds will fall in price rel. to short term bonds. So, what to do? Shorten the duration of your portfolio, i.e. sell long term bonds and/or buy short term bonds.
Since you don't like long term bonds (and the fixed payments they make to you), you may also enter into (long tenor) swaps where you receive floating and pay fixed. A situation known as "being short the swap" (you can think of it as another way of getting rid of the risk from your long term bonds).
