A Fixed Income Investment Strategy During the Crisis

Maureen Stapleton is explaining in the Portfolio Management class. During the beginning of crisis when the government yields are falling jump on the Treasuries because falling yields will increase the price of the Treasuries. But at the same crisis period the yields on the corporate bonds increases due to the riskiness of the corporate cash flows, which makes the price of corporate bonds cheaper. At the level of maximum gap (timing chance) you will leave the Treasuries wagon and jump to the Corporates wagon. Because  as the economy picks up the yields on the corporate bonds will fall to earlier levels, again another increase in bond prices. There are two issues in this strategy, one the timing of switching from Treasuries to Corporate because you should be right about your positive view on the economy. Second issue is the liquidity in the market, if you are managing a pension fund portfolio, you may not find the enough corporate bonds in the market at the bottom of the crisis (where the yield gap is at peak).

all mistakes in this post is mine.

Advertisement