Can someone help me understand the difference between these two strategies? Btw, I understand the carry trade very well.
|Buy-and-hold|Constant without active trading|Coupon income**|Add duration beyond target given static yield curve view|**
Rolling down the yield curve|Constant, with Δ Price as maturity shortens|Coupon income +/− Rolldown return|Add duration and increased return if future shorter-term yields are below current yield-to-maturity|
One is held to maturity and taken duration is higher than required to buy at higher yields at inception.
Rolling down the yield curve = these are not necessarily held to maturity. = So are impacted by changes in ST yields than other.
well, let’s say we index is dur 5, and I buy zero coupon with duration 10. if yield curve doesn’t change then my 10-year (investment horizon) IRR doesn’t change and is equal in both scenarios since the bond prices reflect the coupon structure and the yield curve. I am so confused.
Buy and hold and rolling down are not mutually exclusive.
Now coupons don’t play a role but rather yields. If you are buying at duration greater than Target in upward sloping YC, you will buy at cheaper price and when you close at Target duration, can get higher price.
Rolling down is assessing how much yield has changed over certain time period ( we assume constant yield curve, not flat but constant).