A Framework for Analyzing Yield-Curve Trades推荐.pdfVIP

CHAPTER FORTY A FRAMEWORK FOR ANALYZING YIELD-CURVE TRADES ANTTI ILMANEN, PH .D. Senior Trader Brevan Howard Asset Management LLP In Chapter 8, it was explained that the shape of the yield curve depends on three main determinants: the market’s rate expectations, the required bond risk premia, and the convexity bias. In this chapter we show how to decompose the forward rate curve into these three determinants. Even though we cannot observe these determi- nants directly, the decomposition can clarify our thinking about the yield curve. Our analysis also produces direct applications—it provides a systematic framework for relative-value analysis of noncallable government bonds. Analogous to the decomposition of forward rates, the total expected return of any government bond position can be viewed as the sum of a few simple building blocks: (1) the yield income, (2) the rolldown return, (3) the value of convexity, and (4) the duration impact of the rate view. A further term should be added for bonds that trade “special” in the repo market and for bonds that trade very rich or cheap against the fitted curve. The following observations motivate this decomposition. A bond’s near- term expected return is a sum of its horizon return given an unchanged yield curve and its expected return from expected changes in the yield curve. The first item, the horizon return, is also called the rolling yield because i