Monday, August 31, 2009

Riding the Yield Curve

Some active security investors, especially dealers in U.S. Government Securities, have learned to "ride" the yield curve for profit, if the curve is positively sloped, with a slope steep enough to offset transactions costs from buying and selling securities, the investor may gain by timely portfolio switching.
for example, if a securities dealer purchases U.S. Treasury bills six months from maturity, holds them for three months, converts the bills into cash, and buys new six-month bills, he or she can profit in two ways from a positively sloped yield curve. Because the yield is lower on three-month than on six-month bills, the dealer experiences a capital gain on the sale. Second, the purchase of new six-month bills replaces a lower-yielding security with a higher-yielding one at a lower price. Riding
The yield curve can be risky, however, since yield curves are constantly changing their shape. If the curve gets flatter or turns down, a potential gain can be turned into a realized loss. Experience and good judgment are indispensable in using the yield curve for investment decision making.

1 comment:

Bullish Trader said...

Some good information from your site!