Anyone can help to explain why in the steepening yield curve we should pay float - receive fix? I thought steepening means the LT bond has increase its yield, for example if we enter into 10 yrs swap, the fix rate pay 5% (we received 5% and pay float - LIBOR), which LIBOR will increase because the LT bond increase, so why should we receive fix?
Thank you in advance.
The simplest way I understand this is that in a steepening yield curve, you should pay the lower short rate and receive the fixed (higher) long rate.
The yield curve can steepen in two ways: the long end rises, or the short end falls.
If the long end rises and the short end remains unchanged, it doesn’t matter which side of the swap you’re on; the payments remain unchanged.
If the short end falls, would you rather pay the lower floating rate or receive the lower floating rate?
Thank you! still try to digest
Ok so to chime in on what Magician said, lets assume two senarios of steepening curves.
Scenario 1 - short rates fall, long rates unchanged
Here you’re better off paying floating on the short term and receiving fixed on the long term as floating payments will be lower due to falling short term rates.
Scenario 2 - short rates unchanged, long rates rise
Here you wanna pay fixed on short and receive floating on long rates as you’ll receive higher rates with rising long term yields.
Had in my mind that when yc steepening you should decrease duration hence pay fix receive floating. I.e. the total opposite of what OP says.
What do we have here? Assets or liabilities?
Shall we not always think from the perspective of holding assets when talking about YC changes.
Assets we bought to immunize, fund our liabilities?
Any tips on memorizing payer vs receiving swaps and the legs associated - buy/sell etc.
I am taking practice tests every day and mixing myself up at this point lol