Fixed Income Question strategic, allocation, forward, expected

AnalystForum

Forward rates can be used in strategic bond allocation by increasing exposure to market where the expected bond yield is far most above the forward yield.

True or False?

I have the answer but don't know the reasoning, if you know the answer and know the reasoning please post. I confirm the answer in a few.

Darien

Wrong because it says strategic instead of tactical. This would be a tactical decision, to make duration bets about the market. If you expected future rates to be x, and implied forwards were y, and x was greater than y, you would shorten duration to take advantage of what you would expect to be unexpected changes in interest rates.

thommo77

Ans. is False!
Forward rates can be used in strategic bond allocation by increasing exposure to market where the expected bond yield is far most "Below" and not above the forward yield.

Not sure how the logic works, if anybody gets it please explain.

Chuckrox

sebrock Wrote:
-------------------------------------------------------
> Because if the expected bond yield is below the
> forward rate, then you go long the forward instead
> to enhance yield. Much like a to hedge or not to
> hedge question. If the expected bond yield was
> above the forward rate, then you would just stick
> with the bond.



Could not you short the forward if the bond yield is above the forward?


To 1morelevel : there is no typo, the questions and ans is coming straight out of the source.