---
type: convention-reference
status: active
created: 2026-07-19
last_updated: 2026-07-19
purpose: Single source of truth for swap direction-of-trade conventions used in the macro study program. Pinned conventions only — not for derivation work (that lives in blocks/).
---

# Swap Direction-of-Trade Conventions

Locked 2026-07-19 Session 27 after a direction-inversion incident on the 5y5y forward card (Anki note 1784289832127, refactor tag `refactor-2026-07-19-block-020-5y5y-sign-v2`). The convention below is **swap-style** and is canonical going forward.

## The mechanics (always derive from first principles)

A swap has two legs. At inception, the swap is zero-value: PV(fixed leg) = PV(floating leg) = 0 (par). The fixed leg's PV is locked at entry (the cash flows are predetermined). The floating leg's PV moves with the market.

**LONG swap = receive fixed, pay floating.**
- P&L = PV(fixed leg you receive) − PV(floating leg you pay)
- PV(fixed) is locked. PV(floating) moves.
- If market rates rise: PV(floating leg) rises → you're paying more → P&L falls (loss)
- If market rates fall: PV(floating leg) falls → you're paying less → P&L rises (gain)
- **LONG swap wins when rates fall.**

**SHORT swap = pay fixed, receive floating.**
- P&L = PV(floating leg you receive) − PV(fixed leg you pay)
- PV(floating) moves. PV(fixed) is locked.
- If market rates rise: PV(floating leg) rises → you're receiving more → P&L rises (gain)
- If market rates fall: PV(floating leg) falls → you're receiving less → P&L falls (loss)
- **SHORT swap wins when rates rise.**

## 5y5y forward swap conventions

The 5y5y forward is the rate implied today for a 5-year swap starting in 5 years. You can enter today to receive or pay that rate for the period year 5 through year 10.

- **LONG 5y5y forward = receive fixed 5y5y / pay floating.** Wins when 5y5y falls from current level.
- **SHORT 5y5y forward = pay fixed 5y5y / receive floating.** Wins when 5y5y rises from current level.

**Wedge-compression thesis** (5y5y above Fed LR dot, betting on convergence as 5y5y falls toward Fed LR): **LONG 5y5y**.

**Wedge-expansion thesis** (5y5y below Fed LR dot, betting market is right as 5y5y rises): **SHORT 5y5y**.

**TP mean-reversion from extreme low** (TP at post-2010 99th-percentile low, expecting normalization): SHORT 5y5y entered at the low, gains as 5y5y rises toward equilibrium.

## Common error modes to avoid

1. **"Lock in the high rate" framing** — confuses the entry price (what you lock in) with the P&L mechanism (what makes you money). Use the PV mechanics instead.
2. **"Floating drifts to Fed LR" framing** — only valid if 5y5y has compressed entirely via the floating-leg expectation (Fed signaling lower LR). In general, 5y5y can fall via either the expectations leg or the TP leg — the trade captures both.
3. **Convention collision** — rates-trading-futures-style ("short 5y5y forward = receive fixed") is internally consistent under that convention but conflicts with the swap-style convention above. The swap-style convention is canonical for this program. Session 26 historical entries used the rates-trading-futures-style and are NOT rewritten — see process-changelog entry 2026-07-19.

## Cross-references

- Anki note 1784289832127 (Market-Fed LR wedge card, refactor-2026-07-19-block-020-5y5y-sign-v2)
- `~/Obsidian-Macro/00-methodology/study-program/blocks/020-acm-kw-term-premium-in-practice.md` close note (line 46)
- `~/Obsidian-Macro/90-archive/process-changelog.md` entry 2026-07-19
- Session-log Session 27 (this session)