The consensus is that the yield curve will shift up in the coming months, with the yields on longer maturities rising by more than those on shorter maturities. Will this fact simply result in a “narrowing of credit spreads as US companies issue more investment grade bond”? Note that I am NOT asking why spreads are narrowing after more issues.
sorry, sticky but i don’t remember this Q. sounds like something very testable, though – are they basically asking whether a rise and twist in the yield curve with long rates up more than short will lead to spreads narrowing?
The narrowing of the credit spreads as US companies issue more investment grade bonds is due to the Supply Increasing which raises investor confidence and liquidity (Oppostive of Supply/Demand model might suggest) which lowers the spreads.
is this the credit barbell question?
bigwilly Wrote: ------------------------------------------------------- > The narrowing of the credit spreads as US > companies issue more investment grade bonds is due > to the Supply Increasing which raises investor > confidence and liquidity (Oppostive of > Supply/Demand model might suggest) which lowers > the spreads. I know but this is NOT what I am asking.
MaxTheDog Wrote: ------------------------------------------------------- > sorry, sticky but i don’t remember this Q. sounds > like something very testable, though – are they > basically asking whether a rise and twist in the > yield curve with long rates up more than short > will lead to spreads narrowing? The question provides the “consensus” scenario with interest rates and the guys says “WIDENING of credit spreads as US companies issue more investment grade bond…” The sentence itself is already wrong, irrespective of the consensus scenario with interest rates. That’s why I change that a bit and posted my first question.
That answer was that it was Incorrect about the widening…so whats wrong about what i posted???
the point to that question, as bigwilly said, that new issuances will drive the prices up and that will cause the spreads to narrow, so the guy’s statement about widening spreads was “incorrect”
sigh … I don’t think you guys have read the question in my first post. I am asking A but you are saying B which I understands already …
"The consensus is that the yield curve will shift up in the coming months, with the yields on longer maturities rising by more than those on shorter maturities. Will this fact simply result in a “narrowing of credit spreads as US companies issue more investment grade bond”? " Could, if firms expect LT interest rates to increase they might issue debt now to lock in a lower coupon payemetns/lower interest costs…this increase in issuance will narrow the credit spread. Is that what you were asking?? Also, remember the predominate type of bond in the markets is a Intermediate duration bond with no options. So I guess more would depend on teh intermediate structure, but that’s too much info for this question I think.
I think I know what you mean. We have a steepening yield curve which prob means good economic times which means narrowing spreads and also more inflation but also should be mean lt bonds prices fall? So why are lt bonds bonds rising? Why? Because CFA institute said so. That’s why.
This is what I am asking! 
Questions below. bigwilly Wrote: ------------------------------------------------------- > Could, if firms expect LT interest rates to > increase they might issue debt now to lock in a > lower coupon payemetns/lower interest > costs…this increase in issuance will narrow the > credit spread. This makes sense to me. However, on Schweser (p.59, Book 3), under “strategy” for “primary market analysis”, it says — “When you expect rates to fall, you expect new issues and refinances to increase” This only makes sense to me if interest rates HAS FALLEN already. Thoughts? Should I say rates up or down in the exam? > Also, remember the > predominate type of bond in the markets is a > Intermediate duration bond with no options. So I > guess more would depend on teh intermediate > structure, but that’s too much info for this > question I think. agree. Thanks.
I agree this is confusing. The only way to reconcile the two seemingly conflicting viewpoints is that refinancing when rates fall must be due to firms whose performance is not correlated with market activity, or else why would anybody finance their issues? If the yield curve is steep, all prospects are better and firms will issue debt
bigwilly Wrote: ------------------------------------------------------- > The narrowing of the credit spreads as US > companies issue more investment grade bonds is due > to the Supply Increasing which raises investor > confidence and liquidity (Oppostive of > Supply/Demand model might suggest) which lowers > the spreads. This was what i thought, and i agree it’s very confusing since we have frame dependency bias. Same for the question 18 to me, i assume us yield is widening, so i put euro duration as denominator.