Pure Yield Pickup Swap - Explained
What is a Pure Yield Pickup Swap?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is a Pure Yield Pickup Swap?
A pure yield pickup swap is bond purchase and sale transaction, where the investor swaps her short-term, low-yield bond is exchanged for a longer-term, higher-yield bond.
How Does a Pure Yield Pickup Swap Work?
This transaction is used by investors who are looking for more yield and are willing to take on more risk. Basically, it is a way for an investor to exchange her lower-risk assets (short-term bonds) for higher-risk assets (long-term bonds), as the higher-risk assets have a higher return. The downside is that the longer-term bonds are generally a lower quality rating. Long-term bonds have greater risk because there is more time for interest rates to change. If interest rates rise, then the value of previously-issued bonds goes down (as they are at the older, lower interest rate).