Clarification on The Yield Curve, Recessions, and Bond Maturity

Looking for clarification on the BB Ex: 22 Reading 14 with reference to EOC Q#6

  • Knowing that the yield spread will narrow or become negative prior to recession resulting in a flattened or inverted yield curve, I want to extend the duration of my bond portfolio because?
    • Future short term rates are expected to fall
      • Because declining output growth will lower loan demand, lowering rates, and increase bond prices?
      • And monetary policy will move to lower rates, thus increasing bond prices?
    • So buying the 6mo MTY vs. the 1mo MTY will be beneficial because the front of the curve will fall by more than the back of the curve?

Thanks for any feedback!