Matrix Trading

A fixed-income trading strategy that looks for discrepancies in the yield curve, which an investor can capitalize upon by instituting a bond swap. Discrepancies come about when current yields on a particular class of bond (corporate, municipal, etc.) don't match up with the rest of the yield curve or its historical norms.

An investor performing a matrix trade could be looking to profit purely as an arbitrageur - by waiting for the market to "correct" a yield spread discrepancy - or by trading up for free yield, for example, by swapping debt with similar risks but different risk premiums.

Yield curves can be thrown off historical patterns for any number of reasons, but most of those reasons will have a common source: uncertainty about the future of financial markets. Individual classes of bonds may also be inefficiently priced for a period of time, such as a high-profile corporate default that sends shock waves through corporate debt with similar ratings.


Investment dictionary. . 2012.

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