Forecasting interest rates- Set duration longer.
Identifying mispriced bonds- substitution swap- sell same maturity, same coupon bond
yielding 8% and buy the same bond yielding 9%. The idea is the 9% yield, or cheaper yield
will reach the 8% yield.
Yield spread strategies- buy higher yielding/sell lower yielding (intermarket spread swap
or credit spread strategy) In such an intermarket spread swap, the expectation is that the
yield on the new bond will fall (its price will rise), causing the intermarket spread to narrow
Yield curve strategies- Non-parallel shift; is when the yield curve twists into a different
shape
Yield curve twists- a flattening of yield curve
Butterfly shifts-change in hump of yield curve
Bullet strategies- holding a high concentration of portfolio in a certain maturity i.e. 10 year
bonds
Barbell strategies- hold in short and long term. Liquidity in short and higher yield in long.
- buy 5 and 20 year bond; after 1 year, reinvest into a new set of 5 and 20 year
bond to maintain strategy
Bond ladders-Equal investment throughout the yield curve. Buy 1, 2,3,4,…10 year bonds.
After 1 year, reinvest proceeds from maturity of 1 year into new 10 year bonds. When
interest rates rise, the bond prices would fall, but is somewhat offset by allowing the
proceeds from short term maturity to be reinvested at higher yielding long term maturities.