Riding the Yield Curve

Riding the yield curve

Buying long-term bonds in anticipation of capital gains as yields fall with the declining maturity of the bonds.

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riding the yield curve

The purchase of a security with a longer term to maturity than the investor's expected holding period in order to produce increased returns by taking advantage of a positive yield curve. For example, a $10,000, 26-week Treasury bill that yields 10% annually will sell for $9,524, while a 13-week bill that yields 9% will sell for $9,780. Buying the longer-term security, holding it for 13 weeks, and selling it at the existing 13-week bill price will produce a profit of $256, for an annualized yield of ( ^$256/_$9,524 ) × 4, or 10.75%. This yield is considerably higher than what might be obtained by simply purchasing a 13-week bill. Riding the yield curve increases yield only when longer-term interest rates are higher than shorter-term rates.

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Riding the Yield Curve

An investment strategy in which one buys a long-term bond and sells it before maturity. Riding the yield curve allows the bondholder to profit from the declining yield that occurs over the life of the bond.