Carry in a Forward 5s/30s Swap Curve Steepener

Summary

The document describes a proposed forward-starting swap steepener: receive fixed on a five-year swap and pay fixed on a thirty-year swap, with both starting at a future date. It frames carry as the benefit that may arise if the spot five-to-thirty-year curve is steeper than the corresponding forward curve when the swaps begin. The position combines exposure to both maturities, so changes in their relative rates matter.

The post asks how a market view that excessive easing is priced into forward overnight-index-swap rates could relate to the later steepness of the spot swap curve. It does not include an answer, supporting data, or a worked valuation. As a result, it identifies a question about the link between policy-rate expectations, forward rates, and curve carry, but does not establish that the proposed position will earn carry or explain the risks from curve shifts, swap financing, or realized rates.

Key ideas

• The proposed trade receives fixed on a forward five-year swap and pays fixed on a forward thirty-year swap.
• The stated carry intuition depends on the spot curve being steeper than the forward curve at the future start date.
• The post asks how expectations of policy easing embedded in forward OIS rates relate to swap-curve steepness.
• No answer or empirical evidence is provided, so the connection remains unresolved.

Tags

# Seeking carry on the swap curve


# Seeking carry on the swap curve












I am considering the carry profile of a 3M forward 5s/30s swap curve steepener in a pre-easing environment (pre fed rate cut). Basically, in 3 months, I will enter into two different swaps:

(1) A swap in which I receive the current 3M forward 5yr swap rate (and pay the relevant floating rate)

(2) A swap in which I pay the current 3M forward 30yr swap rate (and receive the relevant floating rate)

So long as the spot 5yr/30yr curve is steeper than the current 3M forward 5yr/30yr curve, the value of my position increases (i.e. I accrue carry). E.g. if the 3M forward 30yr yield increases more than does the 3M forward 5yr yield, then I gain more on my 30yr swap than I lose on my 5yr swap.

My question concerns the meaning of the following quote I read in regard to this strategy:

"In a pre-easing environment, seeking carry on the curve expresses the view that too much easing is priced into forward OIS rates relative to what is likely to be realized."

How does too much easing being priced into forward OIS rates have anything to do with the eventual steepness of the spot 5yr/30yr curve (which is what carry depends on)?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.