Hi everyone, Im not very clear about the implication of this question, can you please explain ? An analyst forecasts that spot interest rates will increase more than the increase implied by the current forward interest rates. Under these circumstances: A) the analyst should establish a bullish bond portfolio. B) the analyst should establish a bearish bond portfolio. C) all bond positions earn the same return. THanks a lot In this case when spot interest rates will increase more than the increase implied by the current forward interest rates, it means we have economy contraction?
I think it just means the analysts thinks will rise by more than currently expected by the market. I would think he would establish a bearish bond portfolio. Am I correct?
Agree with you JonnyKay. Because the analyst forecasts that the spot rates increase more than the expectations implied by the current forward interest, he may conclude that those bonds he’s holding will decline in price, or he’ll suffer a loss. To avoid that loss, he should reduce his bond holding, which means establishing a bearish bond portfolio. maxmeomeo, there’s no clear evidence of economy contraction.
Thank you. So I guess the reason why i misunderstand this question because Im not familiar with bearish or bullish bond portfolio. Any particular features can you comment? Thanks