Pure Yield Pickup Swap
What it is:
How it works (Example):
In a pure yield pickup swap, an investor who holds bonds with lower yields purchases higher yield bonds using the proceeds from the sale of the former. For instance, an investor who holds a Treasury bond with a 4% yield may sell it in the market and use the proceeds to purchase a bond with a 7% yield.
Why it Matters:
A pure yield pickup swap allows bond investors to conveniently and effectively shift the yield structure of their holdings through an exchange of more expensive, lower yield bonds for less expensive, higher yield bonds. Though an outwardly attractive , investors should be aware that higher yields generally indicate higher risk.