Overweighting Bonds With Higher Spread?

[Foo]

I have one question from Curriculum EOC question, Question 5, Reading 21 in the Year 2020.

Question: The spread curve for US corporate bonds indicates that the average spread of five-year BB bonds exceeds the average spread of two-year BB bonds by +90 bps. Petit expects the difference between average credit spreads for these two sectors to narrow to +50 bps

Answer from EOC: overweighting US five-year BB bonds relative to US two-year BB bonds

My question is why we overweighting 5 year BB bonds? I thought it has higher spread and we should underweight it because of higher cost. Please correct me. Thank you

[breadmaker]

A dropping spread means lower interest rates, which means the value of the bond goes up.

[Pyng]

In addition to the wonderful @breadmaker, you can read furthermore on this thread.

Spreads (Fixed Income EOC Reading 21)

Petit develops investment recommendations for a currency- hedged portfolio of US and European corporate bonds. She expects US interest rates to decline relative to European interest rates. Furthermore, the spread curve for US corporate bonds indicates that the average spread of five- year BB bonds exceeds the average spread of two- year BB bonds by +90 bps. Petit expects the difference between average credit spreads for these two sectors to narrow to +50 bps. Answer: OVERWEIGHT the US bonds U…

[S2000magician]

@Foo

I thought it has higher spread and we should underweight it because of higher cost. Please correct me.

A higher spread means a higher discount rate: a lower cost, not a higher cost.

Higher spread = higher yield, all else equal.

[Codtrawler87]

And nowadays you get the built-in Fed/ECB put as well, for free.