I have done a PCA on a yield curve and found tha 3 factors are important. They look like level, steepness and curvature.Would somebody be able to explain how best to start hedging each individual factor?

Hi,just some thoughts...- if the 'level' PC is uniform over maturity, you can simply offset a long position in any maturity, by a short position in any other maturity;- if the 'steepness' PC is linear over maturity, you can use some linear weighing function to be long X in maturity 1 and short Y in maturity 2; however this may undue the hedge over first PC. - if the curvature is roughly symmetric around some maturity; simply go long a maturity with a distance x from the symmetric average maturity and go short a maturity on the other side with distance x; it may be possible to combine this hedge with the level PCFind correlated/cointegrated market factors with the scores of your PC's and go long/short in those

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