BB. 8
If the 2 year spread is 350 bps and 4 year spread is 600 bps, why would that mean a flattening curve. Wouldn’t it be upward sloping? And why would the investor sell the higher spread and buy the lower? Shouldn’t it be opposite?
The spread is what u add to the curve. If the spread becomes higher in the future, must mean that the curve is lower.
The lower CDS spread has not accounted for enough risk (hence cheaper), whereas the higher CDS on the same reference accounts for too much risk (hence more expensive). So you’d buy the lower CDS spread and short the higher one.
Thanks