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In practice, how are swap spread positions actually sized and constructed between the two legs? I would suppose the two legs are simply matched in notional terms.

However, in practice, do traders ever attempt to run some sort of swap spread position with a duration bias? For example, having a swap spread widener on with slightly more dv01 on the pay fixed swap?

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Yes, generally you want it dv01 hedged not notional hedged to capture the spread changes in basis points.

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  • $\begingroup$ Thanks Edward. Do you have any insight on whether in practice, trades sometimes run a duration bias by underhedging or over hedging one of the legs? $\endgroup$ – CreditNecromancer Jan 8 at 11:19
  • $\begingroup$ Maybe, people use all types of different hedging strategies including principal component analysis, regressions, dv01. Many swap and curve trades are directional so you might have a duration bias, but probably not for the purposes of having an explicit duration bias. $\endgroup$ – Edward Watson Jan 8 at 14:44

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