So the secret sauce says If interest rates are expected to rise, buy short duration bonds and sell long duration bonds. Can someone explain the logic to me?
Try searching this one heer. I think somebody already posted about it. I can’t remember what was decided.
I did found this one http://www.analystforum.com/phorums/read.php?13,926907,927934#msg-927934 … I am still not getting it
This may be if you have a fixed income mandate for part of your asset allocation. For instance you have to stay invested in 30% fixed income. Since the interest rates are expected to increase (and you have to be in bond) you would want to hold the lowest duration bonds you could to avoid getting killed on price risk. ???
hehe sounds like too much thinking I found the below post on duration and it now makes sense completely Re: Understanding Duration Posted by: gauravku (IP Logged) [hide posts from this user] Date: March 30, 2009 09:56AM Duration is basically the sensitivity of price of a fixed income security with change in interest rates and its units is years. High duration means high risk to interest rates. Also, there is a negative relation between then change in price and change in interest rates for fixed income security. Duration = -(change in price)/(change in interest rate) now, if you are expecting interest rates to decrease, you want to derive max. profit so you are long for high duration securities and if you expect interest rates to increase you are long short term and short long term. Also, you cana use derivatives like options, futures, fowards and swaps to change duration of securities, you buy futures to increase duration and sell to decrease it. u must have got that, as its mathematical and calculative, so easy to grasp. hope this helps. addition - duration can be for any asset, its basically price sensiticity of an asset to interest rate movements, however, generally it is referred with respect to fixed income securities as they are very sensitive to interest rates.
Duhh me I always make the first mistake of associating duration with time horizon and then relate it to the short term and long term yield curcve …eeks !! thanks mwvt9 and gauravku (for your earlier posts)