Yield curve strategies #27 (reading 20)

So there is this official problem that looks kind of way too long for a typical CFA problem or maybe I am too tired/dumb to get a hold of it.

The problem asks for highest returns on various portfolios. The right choice involved hedging the currency that is not expected to appreciate/depreciate against the other one. Then it moves to calculating returns on the bond in six months and so and so. It is IMO way too long and seems that it is not properly covered in the actual reading. I would appreciate if someone could shed some light here.


There is no way for me to understand that question. Totally frustrated. If see this on an exam day, just give up.

Don’t give it up just yet. Go and make it your bitc*. “Smooth seas do not make skillful sailors” African Proverb. Anyway, if you have any question, just ask. I’m sure all your fellows here will be willing to help. Keep it tight buddy!! :v:

To which problem this thread is even in regarding to? hit me.

See the topic for problem number.

You will not get a problem this complex on the exam.

Its purpose is to help teach you the material, and does not represent anything close to a typical exam question.


Please for fixed income, yield curve strategies. Under inter-market positioning. Example 5, Question 4. On page 191, paragraph 3 of d curriculum, it reads, "changing from buying d $1million German 10s (per tentative plan) to selling $1 million would free up $2 million. Please where is d $2 million coming from?

2nd, in exhibit 53, why was the UK 2s intra market trade not switched to buy despite being a positive return? Why will I sell an asset whose return is positive? Same applies to UK 30s too but was used later or is there a criteria to know when to switch and when not to? Maybe I missed something.

You were going to buy a cup of Starbuck’s for USD 4.25.

Instead, you didn’t buy the coffee, and some kind stranger gave you USD 4.25.

You now have USD 8.50 to spend on whatever you like (e.g., cinnamon rolls).

I reached this thread, with the same frustration, as i was totally thrown off by its wordings and complexity.
Now a bit reassured to know this is not an idiosyncratic issue

Without prejudice and absolutely my own :slight_smile:

I don’t care if anything shows up in the exam or not but if there’s a thing to learn I would take it up. No matter what. Spend time and effort to understand the stuff. I mean you are a couple of steps away from claiming your Charter. Sometimes early this year I did address a carry trade yield curve problem along with the magician. The OP was “California dreaming”. Do peruse that. It may help.

FI and Derivatives are considered hard topic areas in Level III. I can’t seem to understand why . Of course I had my nemesis in the form of Behavioural Finance. But that’s another story. Can’t let FI prove to be a challenge.

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Why if in a Yield curve the shor rates decrease and long term rates increase (increase in stepeness) the best strategy is a bullet structure?? from my point of view, a duration management if also very efficient, shorting portfolio duration.

Could you please answer with an example?

thanks in advance.

Greetings friend! When they are talking about bullet, barbell and ladder portfolios they are talking about “long” portfolios (not shorting).

When long term rates steepen, that has a much larger negative effect on the price of bonds with exposures to that part of the yield curve, than the small gains you can get when short-term rates flatten. Due to the duration effect, the two do not cancel each other out - the price effect from changes in the long-term rates dominates the price effect from changes in the short-term rates. So any portfolio holding bonds exposed to the longer side of the yield curve is going to be worse off when long-term rates steepen than portfolios not holding bonds exposed to there.

So, with that in mind, ladder and barbell both have bonds exposed to the long-end of the yield curve. If you think of the yield curve broken into 3 segments: short (S), medium (M) and long (L) … then ladder = S+M+L and barbell = S+L … thus, they are negatively hurt when the long end of the yield curve steepens. They also benefit when the long end of the yield curve flattens. Between the two, barbell is MORE affected by changes in the longer end of the yield curve than ladder is, because barbell is 50% concentrated there while ladder is spread out over medium rates also.

Bullet = M only. There is no S or L in a bullet portfolio for the purposes of the CFA exam. Thus, since it is not exposed to the long end of the yield curve, the outsized price effects from steepening and flattening there does not affect it. Does this help?

Cheers - good luck - you got this :+1:

Thanks for your answer. It clear the bullet/ladered/barbell strategies.
But the question i was required to answer was to indicate which strategy is better if the YC steps.
As you said, the barbel will be the worst here becuase is the one with more weight over higher rates (thus, higher decreasing in value). But why is no duration management the best strategie? shorting portfolio duration will benefit because you will be re-investing at higher rates. Is this not better that the bullet?

PS. I dont remember the options they gave. One for sure was bullet, and the other was duration management. I forgot the 3 one.

Thanks in advance for your time

The question is only relating to a specific twist. You’re assuming the YC doesn’t continue to steepen - in a steepening YC then bullet would outperform a barbell. After the twist, you’d need to reassess the IRR v. Liability discount rate and see if the now higher yields on LT bond would allow you to maximize any surplus.

Because of the second sentence in the vignette:

“The Fund’s mandate allows its duration to fluctuate ±0.30 per year from the benchmark duration.”

There’s no scope for significant duration management.

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