Suppose a portfolio manager is expecting the yield spread be

Suppose a portfolio manager is expecting the yield spread between the Treasury Bonds and Treasury notes to tighten in the next 6 months.

Question options:

1)

2)

3)

4)

Solution

Yield on Treasury Bond is more than on the Treasury notes. So if the yield spread is expected to decrease, that means that :

1. Yield on Bonds might decrease

2. Yield on Notes might increase

In that case, we should short T note and long T bond. (Option 2)