Do Investors Still Gravitate to Preferred Habitats on the US Treasury Yield Curve?

Abstract

The purpose of this study is to test the preferred habitat theory non-econometrically using interviews with the help of a questionnaire for self-guidance on a group of focused investors. Frequencies and simple percentages were used to analyze data. Though many generations of post-World War II economics and finance students were taught that the nature of the liabilities on the balance sheet and the desire to avoid mismatches against assets caused particular classes of investors to gravitate to a preferred habitat on the yield curve, our study based on the responses to questionnaires by a group of U.S. based bond traders and risk analysts shows that more than half of the respondents have no preference as to where on the curve they trade, whether the trade is on behalf of their customers or for the house, and that their arbitrage strategies are driven by opportunities for profit.