Can someone please explain the difference between the two? I am not sure I fully understand.
Q:
To reduce the spread duration of the portfolio to better match that of the index, Nucor is contemplating selling 30-year BB-rated corporate bonds and buying an equal amount of 5-year BB-rated corporate bonds.
A:
During an economic downturn, the probability of a downgrade or default is higher in the near-term than in the long-term. As a result, high-yield issuers may experience an inversion in the credit spread curve.
Given that Nucor would be selling longer-duration bonds and buying shorter-duration bonds with the same rating, the trade is likely to reduce both spread duration and DTS (duration times spread).
How? The spreads for the shorter date bonds will increase more relative to the longer dated so spread duration should increase and likewise DTS?