LAUSR

Abstract The yield curve of the Treasury bonds has important economic implications. Its shape can reflect the expectation of the economy, and the corresponding trading strategy can be formulated by the characteristics of the change in the yield curve. In this paper, co-integration and principal component analysis (PCA) are used to study the term structure of interest rates in China. The three morphological features, level, slope and curvature are extracted. The empirical analysis shows that the level, slope and curvature factors can better describe the morphological characteristics of yield curves. The slope and curvature factor have good stationarity and mean reversion. The butterfly arbitrage strategy is designed by using curvature factor and a stable income can be obtained.