What are the main active yield curve strategies?

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AcadiFi · Accepted Answer

Active yield curve strategies aim to generate alpha by positioning the portfolio to benefit from expected curve movements or mispricings, beyond just matching duration to a benchmark. **Five core strategies**: **1. Ride-the-curve (roll-down)** — Buy longer-maturity bond, benefit from its price rising as it 'rolls down' the upward-sloping curve toward shorter maturity. Works when curve is stable and positively sloped. **2. Bullet** — Concentrate holdings around a single maturity point (e.g., 10-year). Benefits from steepening at shorter end and flattening at longer end. Lower convexity than duration-matched barbell. **3. Barbell** — Hold short and long maturities, nothing in middle. Higher convexity than bullet. Benefits from parallel shifts (convexity advantage) and from mid-curve cheapening. **4. Butterfly** — Triple-position combining bullet and barbell. Long wings, short body (negative butterfly) bets curve will become less humped. Long body, short wings (positive butterfly) bets curve will become more humped. **5. Curve slope/steepener/flattener** — Long one maturity, short another to directly bet on slope change without taking duration risk. ```mermaid graph TD A[Yield Curve
Strategies] --> B[Roll-down] A --> C[Bullet vs Barbell] A --> D[Butterfly] A --> E[Steepener/
Flattener] B --> F[Directional
stable curve] C --> G[Convexity &
shape] D --> H[Curvature
specific] E --> I[Slope
specific] ``` **Decomposition of return**: Active curve P&L = roll-down income + yield income − duration P&L (from shifts) + convexity P&L (from large moves) + spread P&L + FX (if cross-currency). Worked example: Ironforge Fixed Income Group expects the 10s–2s curve to flatten 30bps and the level unchanged. Portfolio: long 10-year (+$100M notional), short 2-year (−$260M notional, duration-weighted). If 10s drop 20bps and 2s rise 10bps (30bps flattening), P&L = long 10Y gain from 20bps rally + short 2Y gain from 10bps rise = positive on both legs.

What are the main active yield curve strategies?

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