why when credit spread widening, will incur short position of Treasures? I thought when credit spread widening, the treasure value drop, a short position will collect gain… Thanks.
If you are short treasuries, when spreads widen, people by treasuries increasing price and selling corp bonds thus increasing the spread.
Nonsense. There’s a ton of literature on it but generally increase interest rates are associated with narrower spreads in short run and uncertain over longer term.
Thats interesting. Why would the yield on a corp bond decrease when interest rates increase in the short term?
The spread decreases. I suppose that when the treasuries rise, if corporates stay relatively the same the spread narrows. At the extreme case, you don’t care about interest rates rising if you own a bond that is going to default anyway. You just want the three 14% coupons on the bond you bought for 32. In the same way any change in interest rates for a defaultable bond is damped by the probability it will default anyway.
Makes sense to me.