Strategies · Library · Fixed income
§5.13Carry
Yield curve spread (flatteners & steepeners)
Bet on the gap between short and long yields. Expect rates to fall and the curve to steepen: buy the front, sell the back. Expect rates to rise and the curve to flatten: the reverse. Matching dollar durations avoids small parallel shifts.
- Asset class
- Fixed income
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Yield gap between two maturities of one issuer
- Entry and exit
- Open the spread on a rate view; close on target.
- Sizing
- Dollar-duration matched legs
How it fails
- Parallel shifts cause losses
- Short leg
- Policy surprises
Data it needs
- inputs ARCANE does not hold
The core trade is long one bond and short another.
How ARCANE uses it
A Call on curve shape can compare TLT with SHY returns as a rough read (paper only).
A long/short spread is needed.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §5.13, p. 76 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.