7.19.2005

Q&A: If an investor believes that yield curve will flatten...

...what could he do to benefit from it?

He could short sell 2-year treasury bond and purchase 10-year treasury bond, for instance.

  • Flatten yields mean long term yields decrease relative to short term yields, thus the opposite price movements (price of long term bonds increase relative to short term)
  • If a decline in rates is expected, bonds prices move up.

Bonus Points

  • Normally the yield curve is upwards sloping. It means that longest bonds have highest YTM than shortest have.
  • Steepen yields mean long term yields increase relative to short term yields, thus the opposite price movements

Category: C++ Quant > Debt

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