Constant Maturity Yield Reading 20 Yield Curve Strategies Example 5

CFA Level III Fixed Income
#1

Hi All

Request your help, in Example 5 Intermarket Positioning R20 Yield curve strategies , it says “Millsap’s projected change in the constant maturity (CM) yield over the next six months. The second is the yield change due to roll down projected for a bond purchased today and held for six months. As an example, a US five-year purchased today is projected to experience a 25 bp increase in the constant maturity five-year yield, partially offset by rolling down the curve by 15 bps, resulting in a net 10 bp increase in yield”

My question is after 6 months the 5 year bond is a 4.5 year bond and do we still need the 5 year Constant Maturity yield to value it ? Thanks.

#2

It will be a 4.5 year constant maturity yield by the end of that period. You will value the bond at the yield of 1.75% (after rolldown of 15 bps) and 2.00% (rolldown + 25 bps shift up).

#3

Thanks a lot Fino, if another 6 months pass by and the bond has 4 years to maturity , should i still use the 25 bps ? is the constant maturity yield the same as YTM ? Sorry i am just trying to understand this

#4

The roll down number will always be based on the (then) current yield curve. So you need that CM yield to get from the original 5-year yield to the current 5-year yield, then to the current something-less-than-5-year yield.