Spread duration - lengthen and shorten across sectors

It is given:

  1. low and stable implied interest rate volatility

  2. spreads to narrow across all spread sectors by 25 bps

  3. and a positively sloped yield curve with short rates rising 50 bps and long rates rising by about 75 bps.

The best strategy would be

A. shorten duration in the credit sector and lengthen duration in the Treasury sector.

B. lengthen duration in the credit sector and shorten duration in the Treasury sector.

C. lengthen duration in all spread sectors and the Treasury sector.

It is B. I get the part of lengthen the credit sector, becuase interest rates would decrease–> prices increase --> so you want long duration. But should not be the same for the Treasury sector?

No because Treasury yields are rising, as mentioned in (3).

Furthermore, long maturity interest rates are rising faster than short maturity interest rates.

You’re going to lose everywhere on the Treasury curve, but you lose less when your duration is short, and you lose less when rates rise less: both point toward shortening duration.

Got it! Thanks!

You’re welcome.

Sorry appreciate your help on this, my understanding is that since the given forecast were: Credit sector -> short & long rise at 25bps and 50bps Treasuries -> short & long rise at 50bps and 75bps Which means it’s still an overall increase to short and long term, wouldn’t it be right to try to reduce the duration of treasuries and also credit? but more so for treasuries over credit?


credit spreads narrow across…

Thanks. Just wondering … perhaps my understanding is off… wouldnt the increase in the yield curve of 50bps and 75 bps mean that the overall curve shift upwards … which more than offset the narrowing of spread sector of 25bps?