CFAR book 4 page 135, last paragraph. Can someone please explain why we would want to invest in longer duration fixed income products, given the yield curve is upward sloping? I thought the simple answer to this is, we don’t want to invest in longer term assets when interest rates are increasing if possible, perhaps provide an example? btw- is it possible they are assuming we hold onto the fixed income products till the yield curve eventually (ultimately) becomes downward sloping…and hence that’s why we should be holding Longer duration fixed income products when (today) the yield curve is upward sloping? thanks, a
One obvious reason is because you have long duration liabilities to cover. You do not want to have an asset-liability mismatch. Second is maybe you are expecting a decrease of yields (or spreads) at the level, and the bonds are cheap. (Sort of what you were speaking of in your post) It also tends to be less volatile than the front end (and if your clients require income, it is better to invest in the long end due to stability of cash flows). So there are lots of reasons really…
Don’t get confused with the shape of the yield curve with interest rate direction. Given the shape of the yield curve is upward sloping doesn’t mean interest rate is going up or down. It simple means the yield curve is normal.
I think ws addressed your misconceptions very well, indeed… Wouldn’t it be great if the yieldcurve told us the direction of rates… We’d all be millionaries…
If you are holding the bond for a short time and expect rates to fall or stay constant, you might just like the extra yield
thanks all! I totally overlooked the scenario with the basis point spreads. that was in the debt reading as well. cheers, a
Hello all, I’ve been working on this on my own…can I pose this scenario…what if the yield curve were inverted? I would have to say, we would choose to invest in short term duration products just as we would if the yield curve was flat I’m not sure how you would be compensated for risk for short term though?
ymmt Wrote: ------------------------------------------------------- > I think ws addressed your misconceptions very > well, indeed… Wouldn’t it be great if the > yieldcurve told us the direction of rates… We’d > all be millionaries… Yeah…at that point, I can also afford $5000-a-pop hooker too.
Well, it’s actually $5000 an hour, so you might get a lot more than just one pop…
because long duration assets will have a higher yield (as YC is upward sloping) and hence the assets can be viewed as cheaper
ymmt Wrote: ------------------------------------------------------- > Well, it’s actually $5000 an hour, so you might > get a lot more than just one pop… LOL!!! ymmt, I like you, and THANK YOU!!