Can someone please explain to me why 1. If interest rates fall, then the port manager should buy short duration and sell long duration bonds. 2. If the nominal spread decreases then the port manager should buy long duration bonds Thx
- If rates fall you should buy LT duration and sell ST duration because prices will go up and LT bonds are more price sensitive (as duration is higher) than ST bonds. 2. If spreads are narrowing, then it means that rates are going higher so you should buy ST duration, not long term. I think you got them reversed. But I can be wrong. Where did you read it from?
,Your answer to 1 is definitely correct, I got it not, if rates are falling then price variability of LT bonds is bigger due to bigger duration, so we want to buy LT potential increase in price. Let me retype my second question from pg 59, SS 9 Bk 3 of schweser " If the yield spread for the sector is expected to narrow, choose longer-duration bonds in the sector as they will gain the most from the decreased rate." Please explain
You missed a key assumption that Schweser makes: “assuming the overall level of interest rates remains stable”. So in that case spreads are narrowing because rates in that sector are decreasing (and not because treasury rates are rising) so you should be long duration in that sector as those bonds experience the highest price appriciation. Was that helpful?
This is confusing.