Yield pickup strategy
Yield pickup is an investment strategy that makes available extra interest gainings for a trader or an investor by exchanging lower-yielding bonds with higher-yielding bonds. This act is done in order to the risk-adjusted performance of a portfolio. However, possible greater returns also come at a greater risk since bonds with longer-term maturities (here, mean higher-yielding bonds) are more sensitive to interest rate movements in the markets. Moreover, there is a positive relationship between yield and risk. With a yield pickup, then, a certain amount of risk is involved since the bond with a higher yield is often of lower credit quality. All in all, this strategy results in worthwhile gains if employed properly, and at the right time. To make it more clear, here is an example of a yield pickup strategy:
Imagine an investor owns the company MMD’s bonds that have a 3% yield. If the investor sells this bond and purchases the bond issued by the company MLK that has an 8% yield, the investor’s yield pickup is 5%.