Sch book 2, LOS 17p, Pg 95
It says ‘if for example, a manager thinks interest rates are set to rise, he will shift fro 9-months instruments down to 3-months cash instruments’.
I thought if the interest rates are rising then it is better to move LT cash instruments as this give better yield. These are unlike bonds, where if interest rates go up, then even YTM goes up.
Can anybody please explain where my understanding is wrong.
Thank you
In can be the case that manager expects rising interes rate through some period of time. Then he does not want to lock in longer-term rate of return (eg. 9 months),because he can wait 3 months and roll the investment further at even higher rate, and so on until the rising interes rate environment is finished.
good
A good general rule is that if you expect interest rates to rise, shorten your duration. Ceteris paribus, shorter maturity = shorter duration.