Forums  > Basics  > Why trade forward rates?  
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Total Posts: 3
Joined: Apr 2018
Posted: 2018-04-10 11:51
I've often seen research papers, bank representatives and trader-type people discuss trading different forward combinations of a yield curve, e.g., "the Japanese yield curve, which again we started trading around 1999 or 2000 when you could do a 5-year, 5-year forward against a 20-year, 10-year forward steepener," or "A 15-year, 15-year forward sterling versus euros". (from Inside the House of Money).

I understand that a 5-year, 5-year forward is a borrowing for 5 years, 5 years from now & that a 20y10y would be a 10 year borrowing 20 years from now and can see the use for hedging. But I'm really curious why these types of combinations are traded speculatively in so many examples--as opposed to simply trading a 5 year rate vs. a 20 year rate.

Is there some other lens from which I can view the meaning of these forwards and what they represent on the curve?


Total Posts: 20
Joined: Mar 2013
Posted: 2018-04-10 23:52
Because spreads between forward yields used to show more anomalies than spreads between spot rates.


Total Posts: 866
Joined: Oct 2008
Posted: 2018-04-18 21:58
Leverage also plays a role (related to the other poster's response somewhat)...

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

Nuclear Energy Trader

Total Posts: 1295
Joined: May 2004
Posted: 2018-05-01 04:57
dont think of them as yield spreads

5x5 = short a 5 yr zero coupon bond, long a 10yr zero coup bond (or vice versa)
20x10 = short 20 yr zero coup bond, long 30 yr zero coup bond (or versa vice-a)

so by doing a 5x5 and a 20x10 you would synthetically be long 10 & 20 yr zcoups and short 5 and 30 yr zcoups ...
... "long the middle and short the wings"

flaneur/boulevardier/remittance man/energy trader
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