[original post removed]
I am currently on my way into work but I can absolutely help you answer this question once I get there but the true master who will give you the perfect response would be s2000magician. He’s the fixed income guy among pretty much everything else lol
1.1 one sure-fire method is to sell off your duration risk via short treasury futures in order to completely alleviate concern regarding the long end bear steepener affecting your position.
1.2 for starters, if you’re assuming the curve is going to flatten in a parallel manner, then you win regardless given downward trajectory of rates and your existing duration position. however, if you’re trying to take on more rate risk, you can therefore go long treasury futures for added duration and potentially higher returns given this vantage point.
1.3 given the view that the belly will do well (i.e. where you’re already positioned) you can i) do nothing and win, ii) add key rate exposure to 5yrs-10yrs via cash pay bonds or futures in order to add tactically to your position given your view, or iii) place option bets on rate movements to collect a payoff given your view.
- there are so many implications to go through, but one key movement would be, all else equal, a rotation from long bonds into equity given pro-growth view (via better jobs print, more economic growth potential now that implies more growth over time, longer term bonds sell off in lieu of investors having a view on longer term growth trajectory of economy, therefore yields prop up and bond prices go down).
I asked him about those 2 days ago and still waiting for a response hopefully he gets back to me!
I will defer to s2k and others more familiar with this space wrt to hedging given the mid-term tenor, but below is my opinion of the basics (solely relative to gvt bonds) which I assume is the purpose of the question:
If you expect the yield curve to steepen (i.e. ST yields decrease and LT increase), you would want to be OW ST and UW LT gvt bonds.
If you expect the yield curve to flatten (i.e. ST yields increase and LT bonds decrease), you would want to be UW ST and OW LT gvt bonds.
If you expect the belly to outperform go long mid and short ST and LT gvt bonds.
Unexpected increase in employment is generally a positive for equities and a negative for bonds.