yield spread

[happyking02]

when the yield spread is expected to narrow (the yield curve is moving toward inversion):
1) long duration bonds should outperform short duration bonds
2) short duration bonds should outperform long duration bonds
3) it depends
can you please explain why

 

[bidder]

1 is correct.
If yield curve is inverted, the shorter dated yields are higher (short term bond prices will be lower) and longer dated yields are lower (long term bond prices will be higher). Therefore, long duration bonds should outperform.