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]
- Forecasting the Yield Curve Shape: Evidence in Global Markets – jfi.pm-research.com [PDF]
- The yield curve as a leading indicator: Some practical issues – papers.ssrn.com [PDF]
- Reaching nirvana with a defaultable asset? – link.springer.com [PDF]
- Investment Bargains in Corporate Bond Markets? – search.proquest.com [PDF]
- Bond Swaps And The Application Of Duration – www.jstor.org [PDF]
- Reaching Nirvana with a Defaultable Asset? – papers.ssrn.com [PDF]
- Yield spreads on EMU government bonds—how the financial crisis has helped investors to rediscover risk – link.springer.com [PDF]
- Commodity prices, convenience yields, and inflation – www.mitpressjournals.org [PDF]
