Aug 16, 2017

How would you rebalance your portfolio between bonds and money market securities?

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Interaction between Bond and Money Markets Assume that you maintain bonds and money market securities in your portfolio, and you suddenly believe that long-term interest rates will rise substantially tomorrow (even though the market does not share your view) while short-term interest rates will remain the same.

a. How would you rebalance your portfolio between bonds and money market securities?

b. If other market participants suddenly recognize that long-term interest rates will rise tomorrow and they respond in the same manner as you do, explain how the demand for these securities (bonds and money market securities), supply of these securities for sale, and prices and yields of these securities will be affected.

c. Assume that the yield curve is flat today. Explain how the slope of the yield curve will change tomorrow in response to the market activity.


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