Yield Curve Ride: Can Produce Some Thrills
Independent Banker › Vol. 59 Nbr. 1, January 2009
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Summary
A tried-and-true strategy of yesteryear can perform very well in the coming months and quarters. Even if you haven't employed this technique, a review of its premise and assumptions will be worth a look. People are talking about the strategy called riding the yield curve. The classic application of this strategy is to purchase a noncallable two-year security, own it for a year and sell it, and then at that point purchase another two-year bullet. If the market yield for the one-year bullet is less than your book yield, your total return is enhanced. Even if you had interest in such a technique in 2006 and 2007, you shouldn't have employed it. The flatness of the curve, and actually the inversion of the curve on the short end, would have blown any benefit. Also, the tight spreads in all traditional bank products made bankers seek more potentially profitable alternatives like collateralized mortgage obligations and long-duration municipals.
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Yield Curve Ride: Can Produce Some Thrills
If so, it's in your best interest to plow ahead through this column. A tried-and-true strategy of yesteryear can perform very well in the coming months and quarters. Even if you haven't employed this te...
See the full content of this document
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