I have a problem in understanding following strategies: 1. bullish flattening trades 2. bearish flattening trades 3. bullish steepening trades 4. bearish flattening trades Can anyone give me the explanation about above strategies? and why they give different rate of return. Thank you
Please refer to the picture below for what each trade is betting on.
As an example, in a bull flattening trade, you're betting that rates will decline AND the yield curve will flatten. The flattening aspect can be easily expressed by buying a long-term bond, while simultaneously shorting a shorter-term bond. If you do NOT structure the two legs to be DV01 neutral, but with a residual long duration exposure, you'd have a bull flattener going on (in practice, this is rarely done). To more precisely express a "bull flattening" view, you need to venture into interest rate options. For example, buying long-rate receivers while selling short-rate receivers would accomplish the goal; this structure is known as a conditional bull steepener.
Other trades can be structured analogously.