I know that if long term rates are expected to fall then investor should favor long duration bonds. Will this stratergy also hold true for short term rates? I also saw a statement that spreads would narrow when yeilds are falling, so is yeild and interest rate interchangably used in our curriculam?
The reason why you would choose longer duration bonds, when interest rates are in decline, is because you want to fixate today’s interest rates and receive this income for as long as the yield is downward sloping… If, however, you have a bond with a duration less than desirable, you would enter into a paying floating - receiving fixed swap to increase your duration… If short term rates are expected to fall, then I wouldn’t do anything… regarding yields v. interest rates: yes, people use these terms interchangeably…