Managing the Interest Rate Risk of Multiple Liabilities: Contingent Immunization

A manager of an immunizing bond portfolio sees the yield curve rise, and this results in a decision to synthetically rebalance by selling T-note futures contracts. There is a surplus, so the manager decides to sell extra futures contracts. This reflects what anticipation of the yield curve?

No. Since T-note futures are being used, a steepening could have an ambiguous effect on the value of the bonds. Consider the parallel shift that would clearly allow the manager to win.

Good work! If the manager is right and yields continue to increase, this strategy will leave the manager short T-note futures at a time when higher yields are causing bond prices to decline. This will provide extra surplus.

Not so. This would cause the manager to lose the surplus.

A steepening

A continued increase

A return to the prior position