Which of the following is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion? A) Sell corporate bonds and purchase treasury bonds. B) Enter a pay-fixed, receive-floating rate swap. C) Purchase corporate bonds and sell treasury bonds. D) Enter a pay-floating, receive-fixed rate swap. How come options for swaps are in this question? While the answer is not one of the swap answers, wouldn’t B work out? Economic expansion, high demand for money, interest rates rise. Thus pay fixed, received floating would be an appropriate strategy too?
We did this one just the other day (although the choices were in a different order). I think C is probably the best answer but we pretty much agreed that B would pay off too.
Thanks Joey. Sorry for the repeat. I wanted to be sure I was not crazy for selecting B. I realize C is the better choice now.
Im in the same boat. Caught between B and C. Both seem right to me. Economic expansion -> IR will probably rise in the future -> Fixed Income securities values go down -> Portfolio manager wants to hedge his fixed rate exposure -> Option B. Economic expansion -> Corporate Debt becomes more attractive relative to Treasury Bonds -> Option C