Bond Trading 1999 - Trading the Yield Curve

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1、TradingtheYieldCurveCopyright©1999-2006InvestmentAnalytics1TradingtheYieldCurve¢Repos¢RidingtheCurve¢YieldSpreadTrades¢CouponRolls¢YieldCurveSteepeners&Flatteners¢ButterflyTradingCopyright©1999-2006InvestmentAnalyticsTradingtheYieldCurveSlide:2ReposFirmAFirmARepurchaseofSecuri

2、tyTodayT1SaleofSecurityFirmBFirmB¢FirmAfundsitselfbydoingarepo¢Paysinteresttothebuyeratthereporate¢FirmBlendsmoneybydoingareverserepo¢RegardedasacollateralizedloanCopyright©1999-2006InvestmentAnalyticsTradingtheYieldCurveSlide:3RepoTrades¢RepoMasterAgreement¢Term¢Mainlyshortte

3、rm:overnight(70%)to1week(20%)¢Longtermuptooneyear(‘Termrepos’)¢RepoRate¢Canbepaidasinterestorbysettingrepurchasepriceabovesaleprice¢Simpleadd-oninterest,360dayyear:(1+rxn/360)¢OvernightreporatetypicallyspreadbelowFedFundsCopyright©1999-2006InvestmentAnalyticsTradingtheYieldCur

4、veSlide:4RepoTrades¢Securities(“Collateral”)¢MainlyTreasuries&Agencysecurities,butalsoCD’sBA’s,CP,MBS¢Creditrisk:appliestobothparties¢Margin(“Haircut”)¢Goodfaithdepositpaidbyborrowertolender¢Sellssecuritiesworth$100,borrows$98¢Rightofsubstitution¢Borrowmaypayextra2-3bpforright

5、toofferlenderothercollateralCopyright©1999-2006InvestmentAnalyticsTradingtheYieldCurveSlide:5RepoMarkets¢Borrowersofcollateral(reverses)¢Mainlydealerswantingtoshortspecificissues¢The“specials”market¢Lendersofcollateral(repos)¢Banks,S&L’sMunis¢Brokers¢Garvin,Prebon,TulletCopyri

6、ght©1999-2006InvestmentAnalyticsTradingtheYieldCurveSlide:6TradingApplications¢CustomerArbs¢Reversestomaturity¢TailsCopyright©1999-2006InvestmentAnalyticsTradingtheYieldCurveSlide:7CustomerArbs¢Reversestomaturity¢Yieldshaverisen,customerportfoliosareunderwater¢Portfoliomanager

7、scan’ttakealoss¢Carryingsecuritiesatbookvalue,ratherthancurrentlowermarketvalue¢Choice:¢Sellsecurities,bookloss,&reinvestproceedsathigheryields¢Hangontounderwatersecurities,avoidbookingaloss,earnaloweryieldCopyright©1999-2006InvestmentAnalyticsTradingtheYieldCurveSlide:8Revers

8、estoMaturity¢Dealerofferstoreverseinunderwatersecuritiesforre