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CFAI 2014 Mock PM C - Spong Q6
6.) Given Vertex's forecasts in Statement 4, the most appropriate strategy for Vertex is to:
A. shorten duration in the credit sector and lengthen duration in the Treasury sector.
B. lengthen duration in the credit sector and shorten duration in the Treasury sector.
C. lengthen duration in all spread sectors and the Treasury sector.
Answer = B
As spreads tighten the credit sector will benefit from increased exposure to longer duration issues. Because the yield curve is expected to steepen, it would be appropriate for Vertex to shorten duration in Treasuries because rising yields will cause security prices to fall. Ideally, the net effect should be to reduce duration below the benchmark.
Why do we have to lengthen duration in the credit sector? I thought rates are all rising and spreads are tightening? I don't get the explanation of the Treasuries bit as well. Please help.