plain vanila swap question

which of the fllowing transcation is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion? A enter a pay floating, receive fixed rate swap B. enter a payfixed, receive floating rate swap c. sell corporate bonds and buy treasury bonds d buy corporate bonds and sell treasury bonds


is there a clear relationship between economics expansion and interest rate level? why D?

You will buy a corporate bond during expansions since u think the company will do good and its earnings will be higher. What is the ans to this one btw

it is D. you are right

what about B? rates go up, his bonds pay fixed amount, and can’t sell them because their price goes down… so he pays the fixed, receives floating

that is what i thought too! I chose B. that is why i asked the question if there is a definite relationship between economic expansion and interest rate level

I like B better. Economic expansion means more demand for money which generally (not always) means interest rates up. Playing credit spreads to tighten just because default risk is down doesn’t sound like a good game to me. Increased demand for money makes interest rates up which generally means credit spreads up too.

the answer says D because the difference between the corporate bond rate and treasury rate will narrow, which means corpoprate will have less credit risk now. I do not see why this can make corporate bond a buy

I definitely would have gotten this one wrong… So the premise behind D is that the corporate bonds higher yields are more attractive when business conditions are better, even though the yields come down a little (due to decreasing credit spread)?