Yield Curve Trading Workshop

Yield Curve Trading is a two day course that provides participants with a framework to formulate yield curve trading strategies. It presents several theoretical yield curve analysis tools and their application in a practical trading context. It considers theories of the term structure, RV methods to detect value along the curve (such as PCA) and macro economic impacts on the yield curve. It discusses trading strategies along a single yield curve and between two yield curves, including swap spreads and basis swaps. Advanced curve fitting methods are presented, enabling delegates to assess the value of individual bonds. Some knowledge of bond market cash and derivative products is assumed. Each delegate will be equipped with a PC and Microsoft Excel.

Revision of basic concepts

  • Zero, par and forward rates
  • Carry and roll-down; The impact of repo rates
  • Bond yields as a combination of real yields, inflation and a risk premium
  • Real yields and economic growth
  • Nominal yields and inflation expectations
  • Risk premium and fiscal policy
  • Supply and demand

Trading spreads along the yield curve

  • Flatteners/Steepeners, butterflies, condors
  • Weighting
  • Directionality
  • Speed of mean reversion and Sharpe ratio

Finding relative value along the yield curve: PCA

  • Factor models: Nelson-Siegel and PCA
  • Gaining insights into the market mechanisms behind yield curve moves
  • Decomposing the yield curve moves into uncorrelated factors
  • Identifying and excluding the impact of the direction on yield curve trades: generating alpha
  • Hedge ratio calculation
  • PCA as a monitor for trades
  • PCA as an asset selection tool
  • PCA for curve reconstruction and forecasting

Trading spreads between curves

  • Nominal versus real yields: Breakeven inflation
  • Risk premium versus CDS: Basis trades
  • Bonds versus swaps: Asset swaps
  • Yield curves of different issuers: Credit spreads; Eurozone spreads
  • Yield curves in different currencies: Basis swaps
  • Box trades as a combination of spreads along the yield curve and between curves

Models for the yield curve

  • Vasicek model: Bond yields as the expected path of short term rates
  • Shadow rate model: The impact of negative interest rates on the shape of the yield curve
  • Pitfalls

Fitted curves: Asset selection for yield curve trades

  • Different methods for fitting a yield curve through a number of bonds
  • Incorporating external information, such as benchmark status
  • Analytical value of fitted curves: Constant maturity zero and par rates
  • Practical value of fitted curves: Finding the best individual bonds for yield curve trades