Investing in bonds is a smart decision because it can produce three different ways for you to make money. The first way would be through coupon payments, price appreciation if bought at discounted rates and held until maturity or trading around interest rate volatility before they mature - when Rates go up prices rise too!
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Most investors think in terms of buying and holding, but professional portfolio managers trade bonds all the time. For example high yield bonds are often bought for potential price appreciation as well as some risk-adjusted return - so they're not held to maturity on an ongoing basis because there's too much default risk involved with this type of investment strategy.
What is spread compression? It's when an investor sells a high-quality bond in anticipation that its price will rise, so he can buy one with lower yields. For example American AA rated corporate bonds should trade pretty closely to US Treasury Securities; but if investors believe the market has become too risky for them - meaning there are more risks than usual on offer--they may dump even quality assets like these and overbuy Treasuries instead (which makes sense because this would give you higher returns). As people start trading back into safer investments after their risk Assessment Period ends ,the difference between both yield rates widens.
Trading bonds can be a great way for investors who want more control and flexibility in their portfolios.The first thing you need to know about trading these financial products is that there are actually two types of traders - Hedge funds or proprietary desks which handle all sorts high profile trades day by day while eventuality retail buyers usually only enter into short term positions with leverage (which means they're taking on big stuff).
There are many strategies for trading bonds, such as arbitrage. In this strategy traders take opposite positions in two similar assets that should have similar features but are being priced based on market anomalies or some other macroeconomic factor; they hope over time these differences will disappear and prices can meet again at their original level with a small profit made along the way while compressing any spreads between them doing so - regardless if both rise/fall together.
That is an innovative way to trade bonds and it shouldn't be part of traditional fixed income portfolio management. But as you see, the principle behind spread compression remains in place!
