A more interesting way to play the yield curve
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A MORE INTERESTING WAY TO PLAY THE YIELD CURVE Everyone and their dog likes curve steepeners as part of the Trump trade, betting that a second Donald Trump presidency would lead to higher inflation, higher policy rates in the medium term, and so higher yields at the long end of the curve.
Yield curves are said to 'steepen' when longer-dated yields rise more quickly than shorter-dated ones, and 'flatten', when the opposite happens.
But there are a couple of problems with this trade, says Jefferies chief Europe economist Mohit Kumar in a note Thursday. Firstly, "the whole world likes steepeners", and secondly "they suffer from negative carry" i.e. it costs money to hold the position.
So what to do? Kumar has three suggestions for more interesting steepeners.
- Combine a 2:10 steepener with a 20% short position in two year yields, as this provides a better carry profile
- Have a steepener with a long five-year inflation-linked bond and a short 30-year nominal bond, as a way of adding a long inflation position
- go long the five year German note , and short the 30 year Treasury bond, as that includes a negative view on the German economy
(Alun John)
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