Pay floating …Can somebody explain the rationale? Gracias
Issued floating rate debt to invest in fixed rate debt.
because you are receiving a fixed rate of return. FLoating rate bonds will have a lower duration, because the coupon resets to market rates (hence less sensitive to interest rate shifts) fixed coupon bonds will be more sensitive to interest rate changes (because their coupons dont reset to market rates). So to increase duration, buy fixed coupon bonds - OR enter into a swap where i receive a fixed cash flow (and therefore would be paying floating)
also— buying futures increases duration and selling futures decreases duration. why?
think of buying futures as an inexpensive proxy for buying bonds - buy bonds, increase duration. Sell bonds (short futures), decrease duration.
smileygladhands Wrote: ------------------------------------------------------- > think of buying futures as an inexpensive proxy > for buying bonds - buy bonds, increase duration. > Sell bonds (short futures), decrease duration. Yes, think of 10 Year futures as adding a 10 year duration bond to your portfolio with $7500 down on a $120,000 contract. You can add a lot of interest rate sensitivity quickly. Same thing when you sell futures, which has created the huge rip from 3.50 to 2.95 on the 10 year, lots and lots of covering from the rates are going to 4% by year end crowd.
Well put boys,thanks