Course Schedule

Week 1 – The yield curve

• Introduction to govt bonds and swaps, with specific reference to Germany, UK and US. These currencies will be used as examples throughout.
• Practical guidance on what rates should you be choosing for the curve, and what to be careful of in the post-Libor world
• Maths of the yield curve – forward rates, FRAs, forward ‘curves’, forward ‘path’ of an individual rate.
• Stripping the curve to discover discount factors. Case Study: Curve stripping
• Fitting the curve with Svensson 94. Case Study: Curve fitting
• Bond maths – duration, convexity, convexity + other terms. Practical Example: duration, convexity for simple yield changes
• Examples of the recent period of rising rates and falling bond values, with examples of successful hedging practices. Case Study: hedging a bond in a rising yield environment

Week 2 – Yield curve behaviour

• Past evolution of curves, illustrated in dynamic spreadsheets. Discussion of which market events resulted in different curve types and shifts.
• Is the curve a predictor? Examples of curve ‘predictions’ and results. Practical Example: ‘Feather’ chart illustrations
• Principal Component Analysis of yield curves
  • PCA theory
  • Application to curves
  • Examples of the PCA decomposition of curve shifts into parallel, steepener/flattener, curvature shift components
• Case Study: PCA on the US and EU swap curves, looking at different periods

Week 3 – Yield curve relative value analysis

• Intro: how one would use the previous taught analysis to identify potential “relative value” trades in bonds of the same homogenous issuer set, assuming a 3- or 6-month horizon
• Anatomy of a simple set of trades
• Carry and roll on the curve
• Duration weighting for steepeners and barbells – why we use it
• PCA weighting – why it’s better – contrast it with traditional duration weighting and demonstrate that it is a better system. Case Study: PCA vs duration weighting for steepener and barbell trades
• The impact of funding cost: how to allow for / incorporate where my cost of funds is not IBOR-flat
• Cross-currency trading – a quick recap of xccy basis. A look at hedge pickup trading bonds in different regions, from (a) corporation and issuance point of view, (b) investment view.
• The vanilla approach to HQLA securities selection: given the current shape of the yield curve and a 1-12 month horizon, what approach should I use when determining what securities to select for the HQLA? Include factors such as yield vs tenor, and impact of hedging using IRS or (for sub- 3yr securities) futures

Week 4 – Backtesting yield curve strategies

• How to set up a backtest – what data to use, uses and pitfalls
• Carry trades in all currencies, different parts of curve. How to improve carry trade performance with volatility cutouts and risk management.  Case Study: volatility cutout on carry trade
• Steepener/flattener and barbell trades in backtest. Can we use PCA signals for trades?
• Xccy trades, looking across different yield curves in backtest. Hedge pickup backtest.
• Practical Example: Locking in profit with the EUR-USD xccy basis