What is the criteria upon which an analyst can select a bond to sell, and can I short sell a bond?
Spreads narrowing (recession) = long bonds
Spreads widen (boom) = short bonds
Widening credit spreads are a sign of coming recession, aren’t they?
I see the logic you’re using to make that statement, however, in CFA-land, that will only let you repeat another year. We can NEVER assume about what’s to come. Just think that if spreads are narrowing, we’re already in a recession because interest rates are falling - MP trying to boost economy - and bonds rising.
spreads widening is due to the fact that we’re in a STRONG economy and mp is expansionary as a response to inflation and a STRONG economy with no signs of weakening - so short bonds.
My logic behind this is in recession interest rate tends to be low ( against rising in inflation) low interest rate tends to increase bond value then if bonds are rising you better long it today.
You’re assuming a change in rates though. Central banks absolutely HATE spooking the markets - that is, that the fed will near 100% of the time follow what the market level of interest rates are. Serious, if we were to overlay the changes in monetary policy over the market interest rates, you’ll observe that the fed basically always follows. This is a vital bit of information because it paints the picture that once the fed starts raising rates, they damn well try their best to stay the course. So, if they stay that same course by narrowing spreads, you want to long bonds.
I’m guessing an item set would probably explain to you what the investors expectations are about future interest rates and then ask you to match the investment style to that.
Central banks will interfere in recession wouldn’t they even if they hate to? Definitely yes, so in a recession spreads will narrow AND interest rates will fall using either of those keys will lead you to the same action to go long bond
They wouldn’t be spooking the market though, because market rates have already been falling. Spooking the market would be raising rates, when market rates are falling.
Agreed here they wouldn’t be spooking the market of course