Assess the likely return from a yield curve strategy and the risks it carries

Expected return is built from components: yield income, rolldown return from ageing along an unchanged curve, the expected price change from the manager's rate view, −(modified duration × Δy) + ½ × convexity × (Δy)², credit losses and currency effects. Yield income plus rolldown is the rolling yield. For example, 3% yield income, 0.5% rolldown, duration 6 and an expected 0.25% rise in yield give roughly 3.5% − 1.5% = 2.0% before the small convexity term. Risks include the rate view being wrong, an unexpected curve shape, leverage and time decay on any options used. The trap is double counting: rolldown assumes an unchanged curve, so the rate view must be measured from that curve.