with a neg. butterfly shift, what’s the rule, that intermediate term rates move more than short or long term rates?
No, negative butterfly shift means the line becomes more curved and can happen either way interest rates move. For instance, imagine the yield curve as a 45 degree line going up. If intermediate rates shift more than long term rates (either up or down) a negative butterfly shift has occurred. The yield curve will now actually have some curve to it. Positive is when there is less curvature. Think of a typical normal term structure. If intermediate rates shift so that it goes from a normal curve to a straight line, a positive butterfly shift has occurred.
This is how i have it remembered. A positive butterfly shift, Something positive makes you smile, and short and long term rates increase more then rates in the middle. Whereas a negative butter fly shift, makes you sad and you frown, short and long term rates move down more then intermediate rates. May not be perfect, but has worked for me
justinkc Wrote: ------------------------------------------------------- > This is how i have it remembered. > > A positive butterfly shift, Something positive > makes you smile, and short and long term rates > increase more then rates in the middle. > > Whereas a negative butter fly shift, makes you sad > and you frown, short and long term rates move down > more then intermediate rates. > > May not be perfect, but has worked for me Nice example!
ahhh i still don’t get it… i get the shape of the curve…it is more humped , but what does it mean in terms of which part of the curve is more sensitive? It seems that the middle part (intermediate range) is more sensitive in a neg. shift by definition…my brain is fried sorry.
Positive = more humped Negative = less humped This is straight out of Fabozzi’s book.
Negative butterfly spread – wings (S/T and L/T rates) are pointed more downward, head (Intermediate) stays up. If the negative butterfly is flying up (all rates increase), then the wings go up less than the middle. If the butterfly is free-falling with wings still pointed down, wings go down more than the middle. Opposite for positive butterfly. Works for me. I had to get a wrong answer on a mock to figure this out and for it to make sense – to me at least!
I just assume the middle stays the same and only short and long rates move. So when they give you a key rate duration and different bonds you see which portfolio is most sensitive at the short and long end. The key rate duration will tell you which portfolio is more sensitive. Each of the portfolios will have different sensitivities.
You guys are all giving different answers… I thought positive butterfly = points upwards so long term rates rise relatively, “smile” as justinkc said, and negative butterfly, points downwads = “frown” and long term rates drop relatively.
Dammit. Why didn’t they call it a Camel shift instead of a damn flutterby? Wouldn’t have to take ten steps to decipher it. Positive CAMEL shift—DUH’ Negative CAMEL shift–the one that’s not positive. From henceforth, I dub thee THE CAMEL SHIFT
hawgdriver Wrote: ------------------------------------------------------- > Dammit. Why didn’t they call it a Camel shift > instead of a damn flutterby? Wouldn’t have to > take ten steps to decipher it. > > Positive CAMEL shift—DUH’ > > Negative CAMEL shift–the one that’s not > positive. > > From henceforth, I dub thee THE CAMEL SHIFT double dammit "Investopedia explains Positive Butterfly A non-parallel shift in the yield curve happens when not all of the maturities on the curve move by the same rate. For example, if short-term and long-term rates move upward by 100 basis points (1%) while medium-term rates remain the same, the convexity of the yield curve will increase. This yield curve shift is called a positive butterfly shift because it causes the curve to hump. " Someone needs to explain to Prof Fabulous Fabozzi and Investopedia what a hump looks like. Soooo… The ANTI-CAMEL shift.
This is what the CFAI text (V5 p. 239) says: “A positive butterfuly means that the yield curve becomes less humped (i.e. has less curvature). This means that if yields increase, for example, the yields in the short maturity and long maturity sectors increase more than the yields in the intermediate maturity sector. If yields decrease, the yields in the short and long maturity sectors decrease less than the intermediate maturity sector” A negative butterfly is the opposite. This has now got me really confused.
justinkc Wrote: ------------------------------------------------------- > This is how i have it remembered. > > A positive butterfly shift, Something positive > makes you smile, and short and long term rates > increase more then rates in the middle. > > Whereas a negative butter fly shift, makes you sad > and you frown, short and long term rates move down > more then intermediate rates. > > May not be perfect, but has worked for me Dorky, but it works!
s302632 Wrote: ------------------------------------------------------- > This is what the CFAI text (V5 p. 239) says: > > “A positive butterfuly means that the yield curve > becomes less humped (i.e. has less curvature). > This means that if yields increase, for example, > the yields in the short maturity and long maturity > sectors increase more than the yields in the > intermediate maturity sector. If yields decrease, > the yields in the short and long maturity sectors > decrease less than the intermediate maturity > sector” > > A negative butterfly is the opposite. > > This has now got me really confused. At this point, don’t try to understand it. Commit to memory and move on.
s302632 Wrote: ------------------------------------------------------- > This is what the CFAI text (V5 p. 239) says: > > “A positive butterfuly means that the yield curve > becomes less humped (i.e. has less curvature). > This means that if yields increase, for example, > the yields in the short maturity and long maturity > sectors increase more than the yields in the > intermediate maturity sector. If yields decrease, > the yields in the short and long maturity sectors > decrease less than the intermediate maturity > sector” > > A negative butterfly is the opposite. > > This has now got me really confused. So, a positive butterfly can happen when yield are moving up or down, then won’t the negative butterfly just be a hump. So, POSITIVE BUTTERFLY = TWO HUMP CAMEL NEGATIVE BUTTERFLY = ONE HUMP CAMEL Is this correct?
Start with a parallel line at 45, interest rates on the yxis and time on the xaxis negative - all rates decrease, but short and long decrease more (frown) positive - all rates increase, but short and long increase more (smile) This is what I always thought…but all the above comments are making me reconsider
This is right. All you need to know is short and long term rates are more sensitive. They will most likely give a table of different portfolios with different key rates. They could ask given a negative butterfly shift down which bond will respond the best. So you see which one is most sensitive at the short and long rates. They could also do the opposite and say given an upward positive butterfly shift which bond will perform the worst.
More than one poster has already explained it on this thread. A negative butterfly shift occurs when the yield curve becomes more curved. For example, it could go from something that looks like this: …*… … …*… … …*… … …*… … …*… … …*… …*… … … to something that looks like this: …*… … …*… … …*… … …*… …*… …*…*…*… … … … … … A positive butterfly shift is just the opposite.
Great graphics, but that is a positive butterfly. Your yield curve has gotten less humped to the point it is now inverted and it is making a smile.
You guys are making this more complicated than it really is. Positive Butterfly: S/T & L/T rates move up more than INT rates. The curve “smiles” as justin said above. It will look like a half pipe. Negative Butterfly: S/T & L/T rates move down more than INT rates. The curve “frowns” and the S/T and L/T portions of the yield curve.