Yield Pickup

A yield pickup is the extra interest received by a particular investor from selling one bond and buying another one with a higher yield. That is, the term “yield pickup” is defined as a difference between buying and selling of two different debt instruments having different yield levels.

What is a Yield Pickup 

The higher or lower interest rates, the higher or lower yield on bonds, respectively, which indicates the presence of a direct relationship. However, prices of bonds and yields have opposite directions of movement. The higher interest rates, the greater yield, or yield pickup, investors can get from the sale of old bonds and purchasing new ones. By assuming a similar degree of risk in old and new bonds, the investor increases the return on his portfolio without additional risks. 

In order to achieve a yield pickup in the event of a decrease or maintenance of the current level of interest rates, an investor should buy available bonds at a premium, implying a higher interest rate, or debt instruments that generate higher returns due to a greater degree of risk. It should be noted that such a yield pickup strategy may involve certain costs and risks, but at the same time, the possibility of getting a yield pickup is the most popular reason for trading bonds. 

For example, an investor has a bond issued by X company with a yield of 8%. Then he sells this bond and purchases a bond issued by Y company that yields 11%. As a result, his yield pickup is 3%.

The pure yield pickup swap is another close term. According to such a transaction, an asset with a lower yield is exchanged for an asset with a higher yield. In order to get more yield, the trader is ready to take on more risk. 

More about a Yield Pickup

Nevertheless, getting a pickup is by no means the only reason bonds are traded, another one is an expected improvement of the credit status of the bond issuer, and the subsequent bond movement from junk category to investment. A bond investor's transaction may be a credit-defense or designed to protect his portfolio in order to minimize the possible risk of default, or it can be sector-rotation in order to take profit from the expected results in a particular industry.

Based on the expected direction of change in interest rates, investors can change the duration of bonds in their portfolios using yield curve adjustment transactions. In the event of an expected increase in interest rates, it is planned to reduce the duration of investors' portfolios, and vice versa, in the event of an upcoming decrease in interest rates, an increase in the duration of their portfolios is expected. One way or another, a yield pickup is a goal of traders.