Inside the Yield Book: The Classic That Created the Science of Bond Analysis, 3rd Edition

Chapter 7

Yield Pickup Swaps and Realized Losses

The Pure Yield Pickup Swap

Probably a majority of institutional bond swaps are done purely for the purpose of achieving an immediate gain in return, either in terms of current coupon income or in terms of yield-to-maturity or both. These swaps can be made and often are made without reference to substitutions or to yield spreads, interest rate trends, or overvaluation or undervaluation of the issues involved. For example, suppose the investor swaps from the 30-year 4’s at 67.18 to yield 6.50 percent into the 30-year 7’s at 100 to yield 7.00 percent, just as in the earlier example, but this time for the sole purpose of picking up the additional 105 basis points in current income or the 50 basis points ...