{"id":744,"date":"2024-07-04T13:00:34","date_gmt":"2024-07-04T13:00:34","guid":{"rendered":"https:\/\/www.crowlair.com\/?p=744"},"modified":"2024-08-03T10:41:00","modified_gmt":"2024-08-03T10:41:00","slug":"cfa-level-3-yield-curve-moves-part-1-level-and-slope-shifts","status":"publish","type":"post","link":"https:\/\/www.crowlair.com\/?p=744","title":{"rendered":"CFA Level 3: Yield Curve Moves, Part 1 \u2013 Level and Slope \u2013 Shifts"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"744\" class=\"elementor elementor-744\">\n\t\t\t\t<div class=\"elementor-element elementor-element-03230b6 e-flex e-con-boxed e-con e-parent\" data-id=\"03230b6\" data-element_type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-fee9069 elementor-widget elementor-widget-text-editor\" data-id=\"fee9069\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p style=\"text-align: center;\">Read this, and you will never struggle with yield curve movement questions again!<\/p><hr \/><p><em>This is the first article about this topic. Check the other two:<\/em><\/p><ul><li><em><a href=\"https:\/\/www.crowlair.com\/?p=767\">CFA Level 3: Yield Curve Moves, Part 2 \u2013 Shifts Additional Points \u2013 Inverted Curve<\/a><\/em><\/li><li><em><a href=\"https:\/\/www.crowlair.com\/?p=804\">CFA Level 3: Yield Curve Moves, Part 3 \u2013 Twists, Barbell vs Bullet, Rolling Down the Yield Curve<\/a><\/em><\/li><\/ul><hr \/><p>When actively managing our fixed income\/bond portfolio, we can expect and position for three types of yield curve movements:<\/p><ol><li>Level<\/li><li>Slope<\/li><li>Shape (curvature).<\/li><\/ol><p>The yield curve illustrates the term structure of interest rates for government or benchmark securities, assuming that all promised principal and interest payments are made (neither credit nor liquidity risk is included).<\/p><p>All these movements can happen simultaneously and in combination. We will discuss all important combinations.<\/p><ol><li><h3>Parallel change in level \u2013 parallel shift<\/h3><\/li><\/ol><p>For starters, please remember:<\/p><ul><li>when rates go down, it&#8217;s bullish;<\/li><li>when rates go up, it&#8217;s bearish!<\/li><\/ul><p>If rates go <strong>down<\/strong> <strong>equally<\/strong> along the entire curve (this is rare but the simplest case), it\u2019s a parallel shift <strong>downward<\/strong>.<\/p><p>If rates go <strong>up<\/strong> <strong>equally<\/strong> along the entire curve (this is rare but the simplest case), it\u2019s a parallel shift <strong>upward<\/strong>.<\/p><p>Consider a yield curve consisting of 1-year, 2-year, 5-year, 10-year, and 30-year maturities (black line). If all rates change by +1%, the entire curve will shift up (yellow line). If all rates change by -1%, the entire curve will shift down (green line). This is a pure change of <strong>levels<\/strong>.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-4da067d elementor-widget elementor-widget-image\" data-id=\"4da067d\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img fetchpriority=\"high\" decoding=\"async\" width=\"714\" height=\"486\" src=\"https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/paralell-shifts.png\" class=\"attachment-medium_large size-medium_large wp-image-750\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-9ab9e78 elementor-widget elementor-widget-text-editor\" data-id=\"9ab9e78\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<ol start=\"2\"><li><h3>Change in slope without change in levels<\/h3><\/li><\/ol><p>What about slope? Let\u2019s consider a change in slope without a change in levels. This will be steepening or flattening. To measure this, you need to calculate the difference between long-term and short-term yields. If this number goes up, it\u2019s steepening. If this number goes down, it\u2019s flattening.<\/p><p style=\"text-align: center;\"><em>Long term yield \u2013 Short term yield = Change in slope<\/em><\/p><p>Remember, the graph is useful for visualization, but the mathematical formula is decisive.<\/p><p>Consider these two curves:<\/p><ul><li>For the blue curve, the change in long-term yield (<span style=\"color: #00ff00;\">0.8%<\/span>) minus the change in short-term yield (<span style=\"color: #ff0000;\">-0.8%<\/span>) is positive and equals <span style=\"color: #00ff00;\">1.6%<\/span>.<\/li><li>For the violet curve, the change in long-term yield (<span style=\"color: #ff0000;\">-0.8%<\/span>) minus the change in short-term yield <span style=\"color: #00ff00;\">(0.8%<\/span>) is negative and equals <span style=\"color: #ff0000;\">-1.6%<\/span>.<\/li><\/ul><p>The slopes have changed without changing the levels.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-796ea45 elementor-widget elementor-widget-image\" data-id=\"796ea45\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"594\" height=\"480\" src=\"https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/steepening-and-flattening.png\" class=\"attachment-medium_large size-medium_large wp-image-753\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-f547708 elementor-widget elementor-widget-text-editor\" data-id=\"f547708\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<ol start=\"3\"><li><h3>Parallel change in level + change in slope = non-nparallel shift<\/h3><\/li><\/ol><p>Let\u2019s combine these two moves. A parallel shift (pure change in levels) is rare. A change in slope without a change in levels is unusual. Most likely, we will see a change in level that is not parallel (not equal across the curve), meaning yields will change in the same direction but not with the same magnitude.<\/p><p>In other words, a parallel shift + a change in slope = a non-parallel shift. There are four options: two steepeners and two flatteners.<\/p><p>Let\u2019s examine the <strong>steepeners<\/strong> first, bull (up) and bear (down).<\/p><p>If we combine steepening with <strong>rising<\/strong> rates, it\u2019s a <strong>bear<\/strong> steepener (light blue). Rates are rising, but long-term rates are rising <strong>more<\/strong>. The yield curve is higher and steeper than the original curve.<\/p><p>If we combine steepening with <strong>declining<\/strong> rates, it\u2019s a <strong>bull<\/strong> steepener (dark blue). Rates are declining, but long-term rates are declining <strong>less<\/strong>. The yield curve is lower and steeper than the original curve.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-d47c661 elementor-widget elementor-widget-image\" data-id=\"d47c661\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img decoding=\"async\" width=\"730\" height=\"514\" src=\"https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/steepeners.png\" class=\"attachment-medium_large size-medium_large wp-image-752\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-b4929ea elementor-widget elementor-widget-text-editor\" data-id=\"b4929ea\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>Now, let\u2019s take a look at <strong>flatteners<\/strong>, both bull (up) and bear (down).<\/p><p>If we combine flattening with <strong>rising<\/strong> rates, it\u2019s a <strong>bear<\/strong> flattener (light violet). Rates are rising, but long-term rates are rising <strong>less<\/strong>. The yield curve is higher and flatter than the original curve.<\/p><p>If we combine flattening with <strong>declining<\/strong> rates, it\u2019s a <strong>bull<\/strong> flattener (dark violet). Rates are declining, but long-term rates are declining <strong>more<\/strong>. The yield curve is lower and flatter than the original curve.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-c0d0ac5 elementor-widget elementor-widget-image\" data-id=\"c0d0ac5\" data-element_type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"691\" height=\"511\" src=\"https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/flatteners-1.png\" class=\"attachment-medium_large size-medium_large wp-image-754\" alt=\"\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-ad2b09d elementor-widget elementor-widget-text-editor\" data-id=\"ad2b09d\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p>Remember, the discussed moves are changes in slope, not in curvature. (Change is curvature is discussed in different article.) A change in slope for bear steepeners means:<\/p><ul><li>long-term rates are rising more than short-term ones,<\/li><li>and mid-term rates are rising less than long-term rates but more than short-term rates.<\/li><\/ul><p style=\"text-align: center;\"><strong>Bear steepener<\/strong>: change in short-term (ST) rates &lt; change in mid-term rates &lt; change in long-term (LT) rates<\/p><hr \/><h3>Why does the curriculum tell me that I ought to trade a bear steepener by going short duration?<\/h3><p>Inspired by<span style=\"color: #0000ff;\"> <a style=\"color: #0000ff;\" href=\"https:\/\/www.reddit.com\/r\/CFA\/comments\/1eizlu9\/making_money_from_bear_steepening_and_bull\/\">this<\/a><span style=\"color: #000000;\"> Reddit<\/span> <\/span>post, I&#8217;m providing my view on this:<\/p><p>Duration in general, in the case of a bear move, is much more profitable than shape or curvature trade.<\/p><p>If you forecast a bear steepener, it means rates go up (bear), so you should short duration. Also, long-term rates go up more than short-term rates (steepener), so the long end is going significantly higher! The best strategy here is to short the long end, not a shape trade. (This is why the CFA is valuable \u2013 you might be discouraged by seeming discrepancies and inconsistencies, but this is actually a smart move\/trade, not a &#8220;book trade&#8221;, right?)<\/p><p>If you forecast steepening but are <strong>not sure if it&#8217;s a bull or bear<\/strong>, then a <strong>shape trade and duration-neutral<\/strong> strategy will be more appropriate.<\/p><p>You may switch to a <strong>beta trade<\/strong> to better comprehend this. Let&#8217;s say you think big tech stocks will perform better than REITs. You have two options:<\/p><ol><li>Go beta-neutral, which means going long on big tech stocks and short on REITs.<\/li><li>Take beta exposure and just go long on big tech stocks.<\/li><\/ol><p>Which one do you think is better?<\/p><hr \/><p>This topic is challenging until it clicks. Once you wrap your head around it, it gets much easier afterward. I strongly recommend checking some examples and trying to play with the names of yield curve moves.<\/p><p style=\"text-align: right;\">Go to part 2: <span style=\"text-decoration: underline;\"><em><a href=\"https:\/\/www.crowlair.com\/?p=767\">CFA Level 3: Yield Curve Moves, Part 2 \u2013 Shifts Additional Points \u2013 Inverted Curve<\/a><\/em><\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Read this, and you will never struggle with yield curve movement questions again! This is the first article about this topic. Check the other two: CFA Level 3: Yield Curve Moves, Part 2 \u2013 Shifts Additional Points \u2013 Inverted Curve CFA Level 3: Yield Curve Moves, Part 3 \u2013 Twists, Barbell vs Bullet, Rolling Down [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":762,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"ocean_post_layout":"","ocean_both_sidebars_style":"","ocean_both_sidebars_content_width":0,"ocean_both_sidebars_sidebars_width":0,"ocean_sidebar":"","ocean_second_sidebar":"","ocean_disable_margins":"enable","ocean_add_body_class":"","ocean_shortcode_before_top_bar":"","ocean_shortcode_after_top_bar":"","ocean_shortcode_before_header":"","ocean_shortcode_after_header":"","ocean_has_shortcode":"","ocean_shortcode_after_title":"","ocean_shortcode_before_footer_widgets":"","ocean_shortcode_after_footer_widgets":"","ocean_shortcode_before_footer_bottom":"","ocean_shortcode_after_footer_bottom":"","ocean_display_top_bar":"default","ocean_display_header":"default","ocean_header_style":"","ocean_center_header_left_menu":"","ocean_custom_header_template":"","ocean_custom_logo":0,"ocean_custom_retina_logo":0,"ocean_custom_logo_max_width":0,"ocean_custom_logo_tablet_max_width":0,"ocean_custom_logo_mobile_max_width":0,"ocean_custom_logo_max_height":0,"ocean_custom_logo_tablet_max_height":0,"ocean_custom_logo_mobile_max_height":0,"ocean_header_custom_menu":"","ocean_menu_typo_font_family":"","ocean_menu_typo_font_subset":"","ocean_menu_typo_font_size":0,"ocean_menu_typo_font_size_tablet":0,"ocean_menu_typo_font_size_mobile":0,"ocean_menu_typo_font_size_unit":"px","ocean_menu_typo_font_weight":"","ocean_menu_typo_font_weight_tablet":"","ocean_menu_typo_font_weight_mobile":"","ocean_menu_typo_transform":"","ocean_menu_typo_transform_tablet":"","ocean_menu_typo_transform_mobile":"","ocean_menu_typo_line_height":0,"ocean_menu_typo_line_height_tablet":0,"ocean_menu_typo_line_height_mobile":0,"ocean_menu_typo_line_height_unit":"","ocean_menu_typo_spacing":0,"ocean_menu_typo_spacing_tablet":0,"ocean_menu_typo_spacing_mobile":0,"ocean_menu_typo_spacing_unit":"","ocean_menu_link_color":"","ocean_menu_link_color_hover":"","ocean_menu_link_color_active":"","ocean_menu_link_background":"","ocean_menu_link_hover_background":"","ocean_menu_link_active_background":"","ocean_menu_social_links_bg":"","ocean_menu_social_hover_links_bg":"","ocean_menu_social_links_color":"","ocean_menu_social_hover_links_color":"","ocean_disable_title":"default","ocean_disable_heading":"default","ocean_post_title":"","ocean_post_subheading":"","ocean_post_title_style":"","ocean_post_title_background_color":"","ocean_post_title_background":0,"ocean_post_title_bg_image_position":"","ocean_post_title_bg_image_attachment":"","ocean_post_title_bg_image_repeat":"","ocean_post_title_bg_image_size":"","ocean_post_title_height":0,"ocean_post_title_bg_overlay":0.5,"ocean_post_title_bg_overlay_color":"","ocean_disable_breadcrumbs":"default","ocean_breadcrumbs_color":"","ocean_breadcrumbs_separator_color":"","ocean_breadcrumbs_links_color":"","ocean_breadcrumbs_links_hover_color":"","ocean_display_footer_widgets":"default","ocean_display_footer_bottom":"default","ocean_custom_footer_template":"","ocean_post_oembed":"","ocean_post_self_hosted_media":"","ocean_post_video_embed":"","ocean_link_format":"","ocean_link_format_target":"self","ocean_quote_format":"","ocean_quote_format_link":"post","ocean_gallery_link_images":"on","ocean_gallery_id":[],"footnotes":""},"categories":[1],"tags":[],"class_list":["post-744","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","entry","has-media"],"rttpg_featured_image_url":{"full":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1.png",1251,844,false],"landscape":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1.png",1251,844,false],"portraits":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1.png",1251,844,false],"thumbnail":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1-150x150.png",150,150,true],"medium":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1-300x202.png",300,202,true],"large":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1-1024x691.png",1024,691,true],"1536x1536":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1.png",1251,844,false],"2048x2048":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1.png",1251,844,false],"ocean-thumb-m":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1-600x600.png",600,600,true],"ocean-thumb-ml":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1-800x450.png",800,450,true],"ocean-thumb-l":["https:\/\/www.crowlair.com\/wp-content\/uploads\/2024\/07\/featured-photo-1-1200x700.png",1200,700,true]},"rttpg_author":{"display_name":"Crow","author_link":"https:\/\/www.crowlair.com\/?author=1"},"rttpg_comment":108,"rttpg_category":"<a href=\"https:\/\/www.crowlair.com\/?cat=1\" rel=\"category\">Uncategorized<\/a>","rttpg_excerpt":"Read this, and you will never struggle with yield curve movement questions again! This is the first article about this topic. Check the other two: CFA Level 3: Yield Curve Moves, Part 2 \u2013 Shifts Additional Points \u2013 Inverted Curve CFA Level 3: Yield Curve Moves, Part 3 \u2013 Twists, Barbell vs Bullet, Rolling Down&hellip;","_links":{"self":[{"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/posts\/744","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=744"}],"version-history":[{"count":19,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/posts\/744\/revisions"}],"predecessor-version":[{"id":956,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/posts\/744\/revisions\/956"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=\/wp\/v2\/media\/762"}],"wp:attachment":[{"href":"https:\/\/www.crowlair.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=744"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=744"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.crowlair.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=744"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}