When spreads widen, we want to decrease allocation in corporate bonds and move to higher quality government bonds, is this correct?
Yes. Spreads widen during bad economic times, and investors flock to safe havens like treasuries (and gold)
When spreads are narrow, get your RISK ON and buy high yield, EM, or anything sexy. When spreads blow out/widen, RISK OFF time! Flight to quality is best.
Depends on what they’re asking and how they’re asking it. If they’re asking about correlation between credit spreads and interest rates, during economic slowdown then yes you see flight to quality causing rates to decline and expectation of increased default probabilities/credit downgrades cause spreads widen - i.e. negative correlation. But you need to watch out for if they’re asking what portfolio action to do based on a market view. If spreads widen and you think economic growth will be greater than consensus forecast, you’d want to INCREASE your allocation to risky bonds.