End of Chapter | Yield Strategies Question 21

CFA Level III Fixed Income
#1

An active investor enters a duration-neutral yield curve flattening trade that combines 2-year
and 10-year Treasury positions. Under which of the following yield curve scenarios would you expect the investor to realize the greatest portfolio gain?

A Bear flattening
B Bull flattening
C Yield curve inversion

I didn’t understand the answer key when it says the 2 year YTM for bear steepening will be CONSTANT and the 2 year YTM for bull steepening will be UNCHANGED.

Why are they constant or unchanged? In the Bear situation, shouldn’t there be a portfolio loss of a smaller degree given a smaller rise in S/T rates relative to LT // in the Bull situation, shouldn’t there be a small portfolio gain given a smaller drop in S/T rates relative to LT? Thanks!

#2

The assumptions that they make are that in a bear flattening the yield curve pivots around the long end (so that the yield at the longest maturity remains unchanged), and that in a bull flattening the yield curve pivots around the short end (so that the yield at the shortest maturity remains unchanged).

Here, evidently, they treat two years as the shortest maturity and 10 years as the longest maturity.