Question

• What is your best estimate on the future course of interest rate spreads-widening or narrowing?
• Would you be favoring long duration or short duration bonds right now?
• Do you forecast higher default rates by corporate issuers?

Answer 1

Interest rate spreads are expected to narrow, because there is recession to be expected, and in such times the banks are likely to reduce to lending rates and increase the rates given to saving accounts. This is done with a view to increase the expenditure by the consumers in the market so as to liquidate the economy in an attempt to try to bring the economy out of recession.

Long duration bonds are more suitable right now as they wil provide higher rates on interest and in the future the same is expected to reduce, therefore you can fix a better income for a longer future now by investing in the same.

Lower Default rates are expected as of now because the corporate issuers raising the funds are having highly backed resources to return the income when the time comes and won't default in the same. Also defaults will damage their financial image, therefore, the corporates try their best not to default and thus lower default rates. Mainly, default is expected when the corporates are nearing bankruptcy.