On April 30, 2024, Samuel Kaplan, a fixed-income portfolio manager at Boston-based registered investment adviser Jennison Associates LLC (Jennison), took note of a “butterfly dislocation” on the United States Department of the Treasury bond yield curve. Since the reintroduction of the 20-year US Treasury bond in 2020, unusual supply demand dynamics and bouts of interest rate volatility had pushed 20-year yields above both 10-year and 30-year yields, creating a persistent “dislocation” that defied the historical shape of the curve. His team worked to develop strategies to “capture this market opportunity” and “generate alpha as the curve continues to normalize” using a 10s20s30s duration-neutral butterfly trade. The butterfly spread was less than 20 basis points, so how much would the repurchase agreement leverage enhance returns? He was also wary of US policy risks that could lead to butterfly effects causing the butterfly spread to widen further leading to mark-to-market losses and margin calls as he continued “picking up nickels in front of a steamroller” on behalf of Jennison’s institutional clients.
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