Liquidity Risk

YTs face even more pronounced liquidity challenges than PTs, creating a final significant risk category for holders to consider.

Specialized Market with Limited Depth

YTs represent a highly specialized financial instrument that typically attracts a smaller pool of traders and investors than mainstream assets or even PTs:

• The advanced mechanics of YTs appeal primarily to sophisticated market participants

• The speculative and volatile nature of YTs may deter some liquidity providers

These factors combine to create markets with generally lower liquidity than the underlying yield-bearing assets or corresponding PTs.

Multiplier Effect on Slippage

The same multiplier effect that amplifies price volatility also magnifies slippage when trading YTs:

• Large YT purchases may push prices up disproportionately relative to trade size

• Large YT sales may push prices down dramatically, especially if they exceed typical market depth

• This slippage effect creates a practical ceiling on position sizes that can be efficiently entered or exited

For YT holders, this amplified slippage effect means that transaction sizing and execution strategy become crucial aspects of risk management.

Risk Management Strategies for YT Holders

Given the unique and complex risk profile of YTs, holders can benefit from several targeted risk management strategies:

For Managing Liquidity Constraints:

• Scale position sizes appropriately to typical market depth

• Break larger trades into smaller portions executed over time

By understanding these complex risk dynamics and employing targeted management strategies, YT holders can make more informed decisions about how these innovative but volatile instruments might fit within their broader investment approach.