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Ok so I got this idea, it's very simple so I know I'm not the only one who has thought about it. It is a pairs trade between long and short term treasury swaps, and goes as follows:

Going by current market rates:

USD Libor is 92bps

US 30 Year is 210 over libor

US 5 year is 102 over libor

Long 6 bonds of five year treasury swaps for every 1 short

(More dynamic alteration) Long 1/beta bonds of five year treasury swaps for every 1 short T Bond swap

6 x 102 - 210

612 - 210 = 402 bps profit

4.02% ROI ---> profitable

Earn the risk premium with less default risk.

basis risk exists resulting in some volatility, but still hedges exposure to treasuries, leverage till you reach your volatility target.

It should yield a profit, I don't know whether banks, pensions, or HFs are already doing this. Maybe there is something obvious i'm missing as to why it won't work.

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    $\begingroup$ If you can show how this will make a profit, it will be more useful. $\endgroup$ – Gordon Mar 23 '17 at 19:48
  • $\begingroup$ Probably I don't understand the trade, but isn't it just a bet on the evolution of the (5 vs 10) term structure, i.e. a "steepener" trade? What happens if the term structure "flattens"? $\endgroup$ – Alex C Mar 24 '17 at 1:40
  • $\begingroup$ @AlexC although It does appear profit could be made of predicting yield curve change, The trade focuses on earning interest off the difference in sharpe ratio. IF it flattens It should lose on the 30 year position, however carry costs would improve. $\endgroup$ – FX_NINJA Mar 24 '17 at 13:19
  • $\begingroup$ Why was this downvoted? $\endgroup$ – FX_NINJA Mar 24 '17 at 14:03
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This trade is called a 5s-30s Treasury curve steepener, duration neutral. It is positive carry i.e. if 5yr Treasury yields and 30yr Treasury yields remain the same, it makes money. However, there are scenarios where it loses money. For example, the Fed hikes, causing 5yr yields to rise substantially, but 30yr yields dont rise as much. Some investors are currently doing this trade (hedge funds, money managers). It has had mixed success recently.

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