Mukilteo examines an opportunistic strategy implemented by one of the hedge funds under consideration. The hedge fund manager selects 12 AAA rated corporate bonds with actively traded futures contracts and approximately equal durations. For each corporate bond, the manager calculates the 30-day change in the yield spread over a constant risk-free rate. He then ranks the bonds according to this spread change. For the bonds that show the greatest spread narrowing (widening), the hedge fund will take long (short) positions in their futures contracts. The net holding for this strategy is market neutral.
Q. The government bond strategy that Mukilteo considers is best described as a:
- carry trade.
- yield curve trade.
- long/short credit trade.
A is correct. Carry trades involve going long a higher-yielding security and shorting a lower-yielding security with the expectation of receiving the positive carry and of profiting on long and short sides of the trade when the temporary relative mispricing reverts to normal. A classic example of a fixed-income arbitrage trade involves buying lower-liquidity, off-the-run government securities and selling higher-liquidity, duration-matched, on-the-run government securities. Interest rate and credit risks are hedged because long and short positions have the same duration and credit exposure. So, the key concern is liquidity risk. Under normal conditions, as time passes, the more (less) expensive on-the-run (off-the-run) securities will decrease (increase) in price as the current on-the-runs are replaced by a more liquid issue of new on-the-run bonds that then become off-the-run bonds.
答案是carry trade. spread narrowing会导致higher yielding吗？还是说spread narrowing代表higher liquidity?
