What is the desired outcome of executing a yield curve steepening trade?

What is the desired outcome of executing a yield curve steepening trade?

• A. Maximum duration exposure
• B. Profit from rising short-term rates
• C. Profit from widening yield spreads
• D. Hedging against inflation

Answer: (C)

The desired outcome of executing a yield curve steepening trade is to profit from widening yield spreads. In a steepening yield curve environment, the difference between long-term and short-term interest rates increases. Traders typically take positions that benefit from this divergence, such as buying longer-dated bonds while selling shorter-dated ones. This strategy capitalizes on the expectation that long-term rates will rise faster than short-term rates, thereby widening the spread. In contrast, maximizing duration exposure focuses on increased sensitivity to interest rate changes, which is not the primary aim of a steepening trade. The intention is not necessarily to profit from rising short-term rates, as steepening typically implies a focus on the long end of the curve. Hedging against inflation involves protecting against the purchasing power risk posed by rising prices, which doesn't inherently align with the mechanics or objectives of a yield curve steepening strategy.

The desired outcome of executing a yield curve steepening trade is to profit from widening yield spreads. In a steepening yield curve environment, the difference between long-term and short-term interest rates increases. Traders typically take positions that benefit from this divergence, such as buying longer-dated bonds while selling shorter-dated ones. This strategy capitalizes on the expectation that long-term rates will rise faster than short-term rates, thereby widening the spread.

In contrast, maximizing duration exposure focuses on increased sensitivity to interest rate changes, which is not the primary aim of a steepening trade. The intention is not necessarily to profit from rising short-term rates, as steepening typically implies a focus on the long end of the curve. Hedging against inflation involves protecting against the purchasing power risk posed by rising prices, which doesn't inherently align with the mechanics or objectives of a yield curve steepening strategy.