Basic Question 2

I blame Mo for the poor wording :wink:

bigwilly Wrote: ------------------------------------------------------- > ^ I know that. I misinterpreted the question at > first and meant the LONGER DURATION Bonds within > the Short-Term portion of the YC. I agree with > not buying a 10Y-30Y bond. yes, itā€™s just that when a inverted yield curve is reference its usually referring to the full curve, not any kind of intermediate term structures

You are right, and I should have realized that, I blame too much coffee on over stimulating the brain cells.

I go with bigwilly - increase duration! I think the question has many assumptions: avg int might be same, just st higher LT lower, in such case, really we need to put more into LT bonds, and less ST bondsā€¦

bigwilly Wrote: ------------------------------------------------------- > If its inverted ST Rates are higher than LT Rates, > hence I would go Long Duration expecting the Fed > to decrease ST Rates b/c of impending Recession > and hence a Long Duration will be mroe sensitive > and I will gain more than a Short Duration. Just > my 2 cents. Thatā€™s my reasoning as well. Inverted yield curve is a sign of a slowdown phase in the economy ( less demand for fund while short term rates are still high) so one would expect rate-cuts and long duration would benefit more from this scenario. As for the CFAI recommendation itā€™s also Long term (see Econ end of chapter questions) based on the lower reinvestment income if you go short term and roll the position. ( short term rates are expected to go down as curve becomes flat then upward sloping)

mo34 Wrote: ------------------------------------------------------- > bigwilly Wrote: > -------------------------------------------------- > ----- > > If its inverted ST Rates are higher than LT > Rates, > > hence I would go Long Duration expecting the > Fed > > to decrease ST Rates b/c of impending Recession > > and hence a Long Duration will be mroe > sensitive > > and I will gain more than a Short Duration. > Just > > my 2 cents. > > > Thatā€™s my reasoning as well. Inverted yield curve > is a sign of a slowdown phase in the economy ( > less demand for fund while short term rates are > still high) so one would expect rate-cuts and long > duration would benefit more from this scenario. > > As for the CFAI recommendation itā€™s also Long term > (see Econ end of chapter questions) based on the > lower reinvestment income if you go short term and > roll the position. ( short term rates are expected > to go down as curve becomes flat then upward > sloping) why cant you hold ST and then roll int LT when yield picks up? Am i missing something?

I guess they assume you will stick to one maturity and asking which one would be better ( I believe it was 3 month versus 1 year or something like that, not 30 years)

When the prediction is that the curve moves from being inverted to flat to upward sloping you want to be buying SHORT duration bonds and selling LONG duration. When curve steepens: 1. short-term rate drop increasing the value of short duration bonds 2. long-term rates go up decreasing the value of long duration bonds

It takes time for all this to happen. It doesnā€™t just jump from inverted to flat. First you get slowdown, then rate-cuts, then initial recovery, demand for funds starts to increase and the curve begins to turn.

and by ST i mean 1-3 yr and by LT 20-30 yr

okkk there 3months - 1year is STILL SHORT TERM!

comp_sci_kid Wrote: ------------------------------------------------------- > okkk there 3months - 1year is STILL SHORT TERM! lol, yes it is ST 0-5yr MT 5-20yr LT 20-100yr