Fixed Income Question

Forward rates can be used in strategic bond allocation by increasing exposure to market where the expected bond yield is far most above the forward yield. True or False? I have the answer but don’t know the reasoning, if you know the answer and know the reasoning please post. I confirm the answer in a few.

Wrong because it says strategic instead of tactical. This would be a tactical decision, to make duration bets about the market. If you expected future rates to be x, and implied forwards were y, and x was greater than y, you would shorten duration to take advantage of what you would expect to be unexpected changes in interest rates.

Ans. is False! Forward rates can be used in strategic bond allocation by increasing exposure to market where the expected bond yield is far most “Below” and not above the forward yield. Not sure how the logic works, if anybody gets it please explain.

I’m thinking “strategic” has got to be a typo. It doesn’t really make sense. You allocate more in the long term due to short term dislocations in the forward curve? The second part of the answer doesn’t make any sense either but the first part seems glaringly wrong to me.

Because if the expected bond yield is below the forward rate, then you go long the forward instead to enhance yield. Much like a to hedge or not to hedge question. If the expected bond yield was above the forward rate, then you would just stick with the bond.

it’s a duration issue, right? if expected bond yield is above current, rates are expected to increase, so you want less exposure to interest rate senstivity and thus can use forwards/futures to reduce duration. you would never want to increase bond exposure when rates are supposed to increase, right?

sebrock Wrote: ------------------------------------------------------- > Because if the expected bond yield is below the > forward rate, then you go long the forward instead > to enhance yield. Much like a to hedge or not to > hedge question. If the expected bond yield was > above the forward rate, then you would just stick > with the bond. Could not you short the forward if the bond yield is above the forward? To 1morelevel : there is no typo, the questions and ans is coming straight out of the source.