Bond question, Schweser Book 3, pg 168

At the bottom of the page, the notes state: “If interest rates are expected to rise, buy short-duration bonds and sell long-duration bonds.” “If interest rates are expected to fall, buy long-duration bonds and sell short-duration bonds.” Can someone please explain why this is? Thanks in advance!

If interest rates are expected to rise then the fall in prices of short duration bonds will be lesser than that in long duration bonds, so you buy short duration bonds to lose less and if they are expected to fall then the increase in price of long duration bonds will be more than short duration bonds, so you buy long duration bonds to gain more.

Hmm ^ makes some sense. Is my understanding correct that the interest rate expectation they are talking about here is short term?

Yeah. This is what I just posted in your other thread.

gauravku Wrote: ------------------------------------------------------- > If interest rates are expected to rise then the > fall in prices of short duration bonds will be > lesser than that in long duration bonds, so you > buy short duration bonds to lose less and if they > are expected to fall then the increase in price of > long duration bonds will be more than short > duration bonds, so you buy long duration bonds to > gain more. I have a question: Why I have to buy sth? Can I just buy long-duration bond when interest is expected to decline without selling anything?

yyk, I think this has to do with short-term tactical moves with a portfolio. It could be achieved using futures too.

I would say yes you can …these are just general rules which help take the max benefit from interest rate changes

mwvt9 Wrote: ------------------------------------------------------- > yyk, > > I think this has to do with short-term tactical > moves with a portfolio. It could be achieved > using futures too. Because it is arbitrage strategy? Sorry, I am not with you. Am I supposed to sell sth to get money and then buy another bond?

mwvt9, Probably I think too much. Do you assume both short-term and long-term bonds are already in the portfolio?