Curve-Adjustment Trades

[archived_user]

Under curve-adjustment trades, the example in the CFAI text states that if a portfolio manager believes credit spreads will tighten with rates in general remaining relatively stable, they might shift the portfolio’s exposure to longer spread duration issues in the sector. I am having trouble conceptualizing this example. Any thoughts? Thanks.

 

[archived_user]

If you believe spreads are tightening in the near future, then you want to be holding longer duration issues to benefit from their higher sensitivity to interest rate movements. In this case, the interest rate movement comes from tighter credit spreads, and not general interest rates.

 

[archived_user]

MrSmart wrote: If you believe spreads are tightening in the near future, then you want to be holding longer duration issues to benefit from their higher sensitivity to interest rate movements. In this case, the interest rate movement comes from tighter credit spreads, and not general interest rates.

More specifically, the interest rate decline.
When you expect rates to decline, you want to increase your duration.