I i was lookign at this 2-10 chart and saw that many times in the past the spread was 0.. basically the curve was flat from 2 year onwards..
anyone who has been in thsi business for greater than 10 years could you please tell me why would 10 year money be the same as 2 yea rmoney?? under what scenarios
In broad monetary policy terms, this can happen when, for example, rates are high. One scenario is when the current short rate is perceived to be higher than the potential future growth rate of the economy. More specifically, policy mistakes by the central bank, e.g. the ECB hiking in 2008 (and then in 2011), can lead to a massive flattening as cuts are priced in after the "mistaken" hike.
If you're looking at swaps, rather than bonds, you could also get a flattening effect from the exploding LIBOR/OIS basis.
Got it! if lets say 80% of the time this is due to the central banking mistakes or some sort of short term crisis in the markets then would it be fair to say it always makes sense to fade the flattening??
obviously if u are loaded with cash like Mr Buffet and can take the MTM..
"Always" and trading are two things which do not go together.
It's much more complicated than that.
Yeah, I wouldn't use the term "always" in this context... Maybe "often" is more appropriate. What you need to do always is think about the specific reasons for the flattening and understand whether it makes sense.
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