Under curve-adjustment trades, the example in the CFAI text states that if a portfolio manager believes credit spreads will tighten with rates in general remaining relatively stable, they might shift the portfolio’s exposure to longer spread duration issues in the sector. I am having trouble conceptualizing this example. Any thoughts? Thanks.
If you believe spreads are tightening in the near future, then you want to be holding longer duration issues to benefit from their higher sensitivity to interest rate movements. In this case, the interest rate movement comes from tighter credit spreads, and not general interest rates.
More specifically, the interest rate _ decline _.
When you expect rates to decline, you want to increase your duration.
Just take this as a relative-value analysis. In the case of spread tightening, would you be holding treasuries or corporate bonds?
In the case of spread tightening, higher yield, corporate bonds would be more attractive.