Riding the Yield Curve

If you’re a trader, your goal is to buy low and sell high. Well, higher, at least. Riding the yield curve is one way to attempt this feat.

Riding the yield curve is when you try to profit off the spread of a long-term bond. You buy it, then sell it, since long-term bonds have, well, a long time for the yield to decline. Plus, the starting yield for long-term bonds is higher than medium-term and short-term bonds.

If you’re not caught up on bond market stuff, just use the rationale: people should be compensated more if they’re lending their money out for a longer period of time, right? So short-term bonds have pretty low yields compared to long-term bonds.

But it’s not so linear in real life, as bond prices of all terms go up and down with the tides of the markets. When bond prices go up, that can be because yields are falling as bonds approach maturity.

Thus, you can “ride” the yield curve on long-term bonds, getting yields until they start declining near maturity. At that point, you can sell it. You’ll only know if it was a good idea in the future, to see what ended up happening to it as a result of changing interest rates and other factors.