relative value analysis (fixed income)

[jesswong]

in schweser book 3 pages 259, I want to know why:
yield curve is expected to narrow ( widen), choose higher (lower) yield bond, and
if the yield spread is expected to narrow( widen), increase (decrease) spread duration ? thanks a lot

 

[S666]

If the yield curve is expected to narrow, then bond prices will rise. Bonds with higher yields experience larger price rises when yield spreads narrow than bonds with low yields. This is because if yields are higher, then generally have further to fall.
With regards to the second point, spread duration measures the sensitivity of bond prices to changes in the yield spread. If the yield spread is predicted to drop, then prices are predicted to rise. The higher the spread duration, the more sensitive the bond price to a particular fall in yield spread. So we want bonds with a higher spread duration so that prices benefit more from the expected drop in spread.

 

[S2000magician]

I’m not sure what it means for the yield curve to narrow or widen.
Flatten or steepen, but not narrow or widen.

 

[S666]

S2000magician wrote:
I’m not sure what it means for the yield curve to narrow or widen.
Flatten or steepen, but not narrow or widen.

Indeed…I meant the yield spread

 

[hash_map]

Jesswong, Can you find out the corresponding section in the official curriculum book ? Tried to find it from the offical book, but not exactly located.
Thanks