Matrix Trading

AAA

DEFINITION of 'Matrix Trading'

A fixed-income trading strategy that looks for discrepancies in the yield curve, which an investor can capitalize upon by instituting a bond swap. Discrepancies come about when current yields on a particular class of bond (corporate, municipal, etc.) don't match up with the rest of the yield curve or its historical norms.

INVESTOPEDIA EXPLAINS 'Matrix Trading'

An investor performing a matrix trade could be looking to profit purely as an arbitrageur - by waiting for the market to "correct" a yield spread discrepancy - or by trading up for free yield, for example, by swapping debt with similar risks but different risk premiums.

Yield curves can be thrown off historical patterns for any number of reasons, but most of those reasons will have a common source: uncertainty about the future of financial markets. Individual classes of bonds may also be inefficiently priced for a period of time, such as a high-profile corporate default that sends shock waves through corporate debt with similar ratings.

RELATED TERMS
  1. Constant Maturity Swap - CMS

    A variation of the regular interest rate swap. In a constant ...
  2. Market Arbitrage

    Purchasing and selling the same security at the same time in ...
  3. Risk Arbitrage

    A broad definition for three types of arbitrage that contain ...
  4. Fixed Income

    A type of investing or budgeting style for which real return ...
  5. Yield Curve Risk

    The risk of experiencing an adverse shift in market interest ...
  6. Surrender Period

    The amount of time an investor must wait until he or she can ...
Related Articles
  1. The Impact Of An Inverted Yield Curve
    Bonds & Fixed Income

    The Impact Of An Inverted Yield Curve

  2. Interest Rates And Your Bond Investments
    Investing Basics

    Interest Rates And Your Bond Investments

  3. The Power Of Program Trades
    Active Trading Fundamentals

    The Power Of Program Trades

  4. Time To Take Profits On These 4 Rallying ...
    Chart Advisor

    Time To Take Profits On These 4 Rallying ...

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center