The economy is booming.You believe that the Federal Reserve Bank is likely to raise short-term rates but keep long-term rates unchanged.To act on your belief,you decide to set up a spread strategy.Your initial trade should be as follows:

Question

Quizplus · Accepted Answer

If the Federal Reserve raises short-term rates, the price of short-term bonds is likely to fall (since bond prices move inversely to interest rates). Keeping long-term rates unchanged suggests stability in long-term bond prices. Therefore, selling short-term bonds (expecting their price to drop) and buying long-term bonds (expecting their price to remain stable or rise) is a strategy that aligns with the given belief.

The Economy Is Booming