A way to avoid the shortcomings of the above-described credit curve trade are duration-neutral box trades. Essentially, the trade consists of two legs. The investor buys the long-term bond of issuer A and sells the longterm bond of issuer B. Additionally, he sells short-term bonds of the first issuer and buys short-term bonds of the second issuer. Consequently, the trade benefits from a flattening of issuer A’s credit curve and a steepening of issuer B’s credit curve. This trade, of course, can be constructed to be duration neutral. Yet, there are myriad possibilities to do this. Assuming that no borrowing and leveraging are allowed the duration of the combined trade will always lie between the durations of the second shortest and second longest bond. While the position is insensitive to changes in the yield curve, its performance in general depends not only on changes of the credit curve but also changes of the level of spreads.
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