BROWSE

Yield Pickup

What is 'Yield Pickup'

The additional interest rate an investor receives when selling a lower-yielding bond in exchange for a higher-yielding bond. The bond with the lower yield generally has a shorter maturity, while the bond with the higher yield will typically have a longer maturity. A certain amount of risk is involved since the bond with a higher yield is often of a lower credit quality. Additionally, the investor can be exposed to interest rate risk with the longer maturity bond.

Explaining 'Yield Pickup'

For example, an investor owns a bond issued by Company ABC that has a 4% yield. The investor can sell this bond in exchange for a bond issued by Company XYZ that has a yield of 6%. The investor's yield pickup is 2% (6% - 4% = 2%). Bonds that have a higher default risk often have higher yields, making a yield pickup play risky. Ideally, a yield pickup would involve bonds that have the same rating or credit risk, though this is not always the case.


Further Reading


Further evidence on segmentation in the Treasury bill market
www.sciencedirect.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Forecasting the Yield Curve Shape: Evidence in Global MarketsForecasting the Yield Curve Shape: Evidence in Global Markets
jfi.pm-research.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

The yield curve as a leading indicator: Some practical issuesThe yield curve as a leading indicator: Some practical issues
papers.ssrn.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Reaching nirvana with a defaultable asset?Reaching nirvana with a defaultable asset?
link.springer.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Investment Bargains in Corporate Bond Markets?Investment Bargains in Corporate Bond Markets?
search.proquest.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Bond Swaps And The Application Of DurationBond Swaps And The Application Of Duration
www.jstor.org [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Reaching Nirvana with a Defaultable Asset?Reaching Nirvana with a Defaultable Asset?
papers.ssrn.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Yield spreads on EMU government bonds—how the financial crisis has helped investors to rediscover riskYield spreads on EMU government bonds—how the financial crisis has helped investors to rediscover risk
link.springer.com [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …

Commodity prices, convenience yields, and inflationCommodity prices, convenience yields, and inflation
www.mitpressjournals.org [PDF]
… to investors placing new funds into the bill market, it would lower the yield pickup from swapping … arbitrage away these yield spreads along this highly liquid area of the yield curve indicates … References Amihud, Y. and H. Mendelson, 1991, Liquidity, maturity and the yields on US …



Q&A About Yield Pickup


What does the term "lower yielding" mean?

Lower yielding means that the bond has a shorter maturity.

Why are upward sloping yield curves common?

Upward sloping yield curves are common because investors demand higher returns as they move further away from their money.

What does the term "higher yielding" mean?

Higher yielding means that the bond has a longer maturity.

What is yield pickup?

The additional interest rate an investor receives when selling a lower-yielding bond in exchange for a higher-yielding bond.

What does the term structure of interest rates mean?

The term structure of interest rates means yields to maturity for bonds with different maturities.

Why would an investor want to sell one bond for another with different yields?

To make more money on their investment. This strategy involves taking on some risk, but can be profitable if done correctly.

How can you be exposed to interest rate risk with a longer maturity bond?

Interest rates may rise, which will decrease the value of your investment if it is long-term and fixed income.

How do you explain an upward sloping curve?

An upward sloping curve may be explained by two reasons; first, it may be that the market anticipates inflation in the future, which would make long-term bonds more attractive than short-term bonds. Second, it could be that people expect economic growth in the future, which would make long-term bonds more attractive than short-term ones.

What is a yield pickup?

A yield pickup is the difference between the interest rate on a short-term bond and that of a long-term bond.

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