bond credit spread trading strategies

curve to be the most common shape in recent years. Consider a yield spread increase. For example, the Government of Canada has issued two bonds that are due in 2008, one with a 10 coupon (Canada 10/08) and one with a 7 coupon (Canada 7/08). If it is very obvious that my strike prices are not going to be met, I can let it expire worthless and keep the full credit. Put on these trades when the market sells off and appears to be bottoming. Credit spreads fluctuate due to changes in expected inflation and changes in the supply of credit and demand for investment within particular markets. Higher quality bonds, which have less chance of the issuer defaulting can offer lower interest rates. The current yield on the Sears 11/99.3 compared to the Canada.25/99 yield.5. The credit spread represents the market's perceived creditworthiness of the bond issuer and will not only vary from one bond to another, but will fluctuate over time for the same bond. Repurchase Agreements (Repos) and Reverses Repo, short for repurchase agreement (also known as RP is a form of short-term borrowing for government securities dealers. Corporate Debt, mortgage-backed securities, tax-exempt municipal bonds, and government bonds.

bond credit spread trading strategies

A credit spread can also refer to a type of options strategy where the trader receives a credit.
Three years later, the prevailing interest rate is 3 and, due to the company s good credit rating, it is able to buy back the bonds at a predetermined price and reissue the bonds at the 3 coupon.
There are three different types of credit spreads to consider: Credit spread or vertical spread: Simultaneously purchase and sell options (puts or calls) at different strike prices.
Credit put spread or bull put spread: A bullish position in which you obtain more premium on the short put.
This yield premium is known as the credit spread.

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Right now, these bonds trade 10 bps apart in yield, reflecting the difference in coupon and liquidity. I sell vertical bull put spreads that are substantially out of the money, and on each market dip, I ladder different expirys using weekly and monthly strikes to maintain forex meetup toronto an income stream. Spreads can change considerably as they are based on many factors, as we discuss below. If the Fed raises rates - a dealer could end up with a negative spread. The trader gets to keep the 3 per share (with each contract representing 100 shares) if price of the underlying security if below 45 when the options expire. Since bond prices fluctuate with changes in market yields or the general level of interest rates, in order to determine the factors that influence bond prices we need to understand what factors influence the general level of interest rates. The credit spread is calculated based on the current on-the-run treasury. This yield premium is known as the credit spread. Here are some of the spreads that can be calculated, as well as their commonly understood meaning: Credit Spreads are the differences in interest rates that reflect the credit risk between two bonds. This can also be called a " credit spread option" or a " credit risk option". The investor (lender) in the transaction is entering into a reverse repurchase agreement or reverse.

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