Roll-Down Return
Candlefocus EditorWhen utilizing the roll-down return technique, investors try to take advantage of yield curve adjustments that occur along the way to the bond’s maturity date. In essence, roll-down returns allow investors to sell their bonds at the highest price, before the bond’s coupon rate reaches the level of current market rates. Investors can buy the bonds at the higher rate and sell the bonds at the lower rate, acquiring the difference as a profit.
The roll-down return technique isn’t necessarily the most profitable strategy for bond investors, since the interest rates of a long-term bond can also go up over time. Investors can still sell the bonds prematurely, but they won’t necessarily make a profit in the same way as they would have with a roll-down return. However, investors should still consider the roll-down return method if they believe that the general market is trending downwards, as the technique can provide a guaranteed source of return.
Roll-down returns are also useful for investors who are uncomfortable with the respective uncertainties and risks of investing in long-term bonds. By selling the bonds prematurely, investors can reduce the exposure of their portfolio to rising and falling interest rate risks, while also calibrating the general level of risk associated with their portfolio.
Overall, roll-down returns offer investors an opportunity to earn a return on their long-term bonds before the bond’s value is eroded due to market changes. The strategy is particularly useful for investors who are looking to increase the return on their investments and reduce the principal risks associated with the bond’s market value. To maximize returns, investors should carefully analyze the trajectory of interest rates before committing to the roll-down return strategy.