Long term bond vs short term bond

CFA Level III Economics
#1

Hi All, I am confused with some vey basic logic. Would really appreciate it if someone could clear it up:

In Reading 15, Example 22 - the curriculum says :

When the yield spread is expected to narrow (the yield curve is moving toward inversion), long-duration bonds should outperform short-duration bonds.

My understanding is:

  • when yield spread narrows and yield curve is flat or inverting, long term bond yield is lower. Why will low yield bond outperform?

Also, in general, will investors prefer low yield bonds due to lower risk of defaulting?

#2

When yields decrease, bond prices increase, and vice-versa.

#3

I see. Long term bond will outperform short term in this case as prices will increase due to lower yield.

Thank You S2000magician.

#4

You’re welcome.