yield spread

when the yield spread is expected to narrow (the yield curve is moving toward inversion): 1) long duration bonds should outperform short duration bonds 2) short duration bonds should outperform long duration bonds 3) it depends can you please explain why

1 is correct. If yield curve is inverted, the shorter dated yields are higher (short term bond prices will be lower) and longer dated yields are lower (long term bond prices will be higher). Therefore, long duration bonds should outperform.

i dont get this, can someone explain?

I’ll give it a crack. If yield spreads are expected to narrow that means that interest rates are expected to decrease. When interest rates decrease, Bond Prices increase.

Since duration is a measure of a bonds price sensitivity to changing interest rates, a higher duration bond (i.e higher sensitivity to interest rate movements) will benefit more when interest rates decrease.

That make sense?