If credit investors could have predicted US, euro, and yen yield curve movements perfectly in 2002....

If credit investors could have predicted US, euro, and yen yield curve movements perfectly in 2002, then they would have increased their credit portfolio duration

also this sentence :

During the second quarter of 1995, the rapid descent of the US yield curve contributed to underperformance of high-coupon callable structures because of their negative convexity property.

why???

  1. If investors could predict then that yields today are lower than they were previously, then they would’ve increased exposure to long dated bonds.

  2. Callables will not rise in value as much as non callables when interest rates fall, because the bond issuer holds the right to call them when interest rates move lower. ( the call increases in value to issuer and the bondholder sees a fall in the value of the call written by him). Hence, the issuer may want to call the bond and refinance at a lower rate in the market.