How in a declining macro environment is buying callable and puttable bonds which are said to be scarce and likely at a higher premium, especially the puttables, going to generate better returns? All spreads are widening regardless of if they are callable or puttable.
The difference in premium you are paying on these is assumed to less than what they will be worth going forward? Also if the economy is declining rates may decline via the central bank, and then both the callables and puttables will underperform.
Environment is most likely not declining. “Such a low Interest Rate Environment today” implies that rates have no where to go but up so you want to position your portfolio accordingly. In a rising rate environment, buying new issues that have increased spreads and decreasing demand seems to be the most unfavorable trade. Buying callable bonds in a rising rate environment makes sense as does re-positioning your portfolio.
“Farro begins the presentation by telling the investment committee that the firm’s current macro view is the domestic economy is beginning to slow down given the sluggish global economic environment and, from a trading perspective, bid–ask spreads are widening.”
CFA’s answer is tha buying new bonds is least likely to contribute favorably to portfolio performance given current market conditions of a deteriorating economy and lower liquidity evidenced by widening bid-ask spreads.