relative methodology for fixed income

CFA Level III
#1

hi~ guys, cannot understand following conclusion ,so confused, anyone help?

Relative value methodology

If interest rates are expected to rise, buy short duration bonds and sell long

If the yield spread between entities is expected to narrow, choose longer duration bonds in the sector.

#2

#1 IR increasing, so buy short duration bonds and sell long.

IR increases and so Bonds with long duration fall more. So you sell the long ones. You also buy Short duration bonds, so that your PF sensitivity to IR is lower.

#2 Yield spread is expected to narrow

Yield spread narrowing is good for the bond, so you go long on them. The way I remember is, spread getting narrower means your IR gets lower as well - so you go for longer duration bonds. You also go for lesser investment grade corporate bonds since, spreads across sector are decreasing.

Hope this helps…

#3

1- the longer the duration the more sensitive the bond is to interest rates; thus you’re better off with short term bonds.

2- if yield spreads narrow, interest rates go down, so you’re better off going long term bonds because they’ll have higher price appreciation.

#4

so basically, with IR decreasing ,choose long duration

with IR increasing, choose short duration?

#5

yes