Hi all, Can anybody explain this and is there a mnemonic to remember this? Many thanks S
hmm… STeepener- Sell (starts with an S) ST cds. lot’s of s’s. follow the S. be the S. so STeepener is ok ST and Sell cds… you’ll have to remember to go long the longer term cds, but whatever. it’s something if you’ve got nothing.
when you see steepener, just think of a J curve, that is steep at the end but flat at the beginning. now think that the CDS buyer will expect more bankruptcies at the steep end i.e. in the long-term, so he/she will buy LT CDSes and short ST CDSes.
Flattener - “Things will be good and flatten in the long run” Buy CDS now and sell CDS later If you sell CDS, you want the company’s credit risk to go lower
Steepener: I imagine you going down a ski slope. It’s steep. What does this mean? The company is going to $hit (downhill), so in the LR you are short the underlying, meaning you buy a CDS for the long-term. In the SR, you sell a CDS (long the underlying).