explain how to profit from credit spreads
1. Buy a 10 year Treasury note.
The current yield is about 2.6%. If the Federal Reserve raises rates by 0.25% then that would make the new yield 2.75%.
2. What does that mean?
If you buy a 10 year note for $100 and the new yield is 2.75% then in a year you will get back $103 (100 + 3%). Now, if you sell it, you will lose a small amount of money because of fees but you will still get close to your original investment back.
3. So what do you do?
You can make money two ways: A) if the yields go up even more than 0.25%. In which case, the price of the bond goes down (because people would rather have higher yields than lower ones). You can wait and see what happens or B) sell it before it goes down and buy something similar with less risk (i.e., shorter maturity).
4. What are some other types of bonds to look at?
Municipal Bonds - these are state or city bonds that pay interest without being taxed federally so they are very safe investments but also offer high interest rates because they are considered high-risk by investors who want to be safe with their money but still want high returns.
5. What else can I do?
Corporate Bonds - companies issue these when they want to borrow money for projects or acquisitions. The interest rate on them depends on how risky investors think the company is going bankrupt. Again, there's high reward if risk is low and vice versa but there's also safety in numbers here because if many companies issue bonds then there might be more buyers for those bonds later on so they won't go down as much if there is a bit of panic in the market due to rising interest rates (see next step).
6. When will this happen?
In late September/early October, according To CNBC , "The Federal Reserve is expected to increase short-term interest rates for the third time this year amid solid U.S. economic growth." This means that long term rates will rise as well since short term rates affect long term ones indirectly through an economic concept called "the yield curve".