During a recession, would you invest in Bonds?

CFA Level III
#1

In a recession, already Bonds prices are high (interest rates are low), so why investing in Bonds is a correct decision? I would invest in equities as their prices are low and are bound to raise by the end of the recession cycle (6 months to a year).

I passed by a couple of similar questions that bases the correct answer on selecting the asset that’s already doing well in the cycle . My argument is for investing in the asset that’s cheap and bound for an increase (I’ve been told that ppl make money this way). The questions I’ve encountered are from 3rd party providers (encounter of the 3rd kind). Schweser and its nemesis Finquiz.

Do you think a “proper” CFA question would solicit such an answer?

#2

I’d rather keep it in my bank… why risk my hard earned money?

#3

your conclusions apply to the recovery stage and not to recessions.

#4

^ the same dilemma, recovery already has equity increasing from their lowest point in recession. They start their climb at the end of recession. Buy them near their lowest point. Buying them during recovery is just joining the crowds.

I feel I wanna watch the Exorcist

#5

Bond yields dropping -> positive

Spread widening -> negative

So, depends…

But it’s generally a good time to invest US Treasury in Slowdown and recession phase.

#6

Let’s say you’re midway in the recession cycle. Interest rates are at their lowest. Bonds are at their highest price (With low interest rates, Fed can’t do much). Equities at a very low price. The very next phase is the phase where Bonds prices go down, and Equities go up. What would you do?

If the question is about a decision to be made at the BEGINNING of the recession cycle, then I totally agree with buying Bonds. But any other time during the cycle wouldn’t make sense.

i thought the whole point of investing is better predicting the future, the expected rate, the expected growth, the expected interest rates.

#7

This is a monster. This is what I figured: Some questions refer to new investment, some refer to performance of your existing holdings. And that makes a difference too. I don’t use Schweser so I don’t know. But CFAI has some similarities as you pointed out in OP.

#8

Then I’ll follow the consensus in here, unless someone comes and refer to a CFAI material/question that confirms my initial perspective.

I’ll sacrifice some logic for the sake of this exam.

#9

Schweser provide some constructed response questions for each module in their online content - for the econ section one of the questions is which performs better in a recession stocks or bonds.

They say equities better than bonds, as equities start to increase in price towards end of recession, as investors expect improvement, and bond yields bottom out.

#10

It depends on the client scenario, risk taking ability, biases, time horizon, human capital, etc… lot can be added, its not as simple as we thinks.

#11

THANK YOU. That’s what I think is right.

Now, apart of right and wrong, logical or nonsense; what shall we do for the exam? I passed by some Schweser & Finquiz questions that indicate otherwise. It seems the writers of Qbank are different than Essays’

I for myself, and based on the reference in your post, I’ll follow the argument I stated in the first post.

#12

Starting or during a recession -> bonds

nearing end or exiting recession -> equities

Keep in mind, the formal definition of a recession lags the actual recession. The 2007-2009 recession didn’t see 0% interest rates until the fall of 2008, almost a full year after the actual recession began.

#13

In recession, IR falls but credit spread widens for lower grade bonds. And these bonds are relatively cheaper. When economy gets better, these bonds may outperform. Was the question for this case?

#14

I wish. The justification was for low yield bonds (higher prices). So they were talking about higher quality bonds.

I agree with Galli and CFwhay.

#15

cash drag !!!