Question

3] Select the most accurate match between the secondary bond trading strategy and its description...

A. Credit Defense Trade: Using this strategy, bond traders are looking to protect against worsening conditions such as a downturn in the economy or deteriorating business conditions for given issuer(s) in order to protect against bond price drops while increasing yields when switching to different bonds.

B. Sector-Rotation Trades: Using this strategy, bond traders are looking to take advantage of market changes they are forecasting by buying into bond market sectors that will out-perform the overall bond market and/or move away from sectors they expect to under-perform.

C. Curve Adjustment Trade: Using this strategy, bond traders are looking to increase their portfolio’syield by switching to bonds that have higher yields within the same maturity band although they may have lower credit quality.

Answer 1

B. Sector-Rotation Trades: Using this strategy, bond traders are looking to take advantage of market changes they are forecasting by buying into bond market sectors that will out-perform the overall bond market and/or move away from sectors they expect to under-perform.

A is incorrect because the strategy involves pulling out money rather than distribution.

C is incorrect because the stratgy involves investing in longer spread duration bonds if the trader anticipates credit spreads will tighten and vice versa.

B is the right option because under this strategy the traders reallocate capital towards the sectors expected to outperform others.