2015 CFA Morning paper Question 3 C

CFA Level III
#1

Question states " Blanc forecasts a stronger economy, and a upward parallel shift in the yield curve"

Trade 1: Buy a 10-year Ba1/BB+ consumer cyclical sector bond and sell a 10-year Baa3/BBB- consumer cyclical sector bond of another issuer.

Kaplan answer: the stronger economy should lead to spread narrowing and a potential upgrade for hte lower Ba1 bond. Upgrades from below to investment grade can be particularly profitable with narrowing spread and increased liquidity.

My question: When they mention parallel shift, does it mean no spread change? However, they mention the spread narrowing in stronger economy, does it conflict with each other?

Thank you!

#2

I think there were more 2 trades and each trade was related to one circumstance. Trade 1 was affected by stronger economy forecast, so migration toward lower graded bonds in cyclical sector was solution for this trade while spreads are expected to narrow. Parallel shift was related to next trade. I think it was a yield pick up trade.

#3

This makes sense! At first, I thought both of the conditions apply to both trades.

Thanks, Flashback!