My Question is the yield on MBS is lower than Treasury bonds, isn\'t it buy low

Question

My Question is the yield on MBS is lower than Treasury bonds, isn't it buy low and sell high? which is choose to buy MBS and sell Treasury bonds

If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds, a hedge fund pursuing a relative value strategy would ______.

A.

short sell the Treasury and short sell the mortgage-backed securities

B.

short sell the Treasury and buy the mortgage-backed securities

C.

buy the Treasury and buy the mortgage-backed securities

D.

buy the Treasury and short sell the mortgage-backed securities

E.

C only since short sales are prohibited

A.

short sell the Treasury and short sell the mortgage-backed securities

Explanation / Answer

If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds, a hedge fund pursuing a non-directional strategy would buy the Treasury and short sell the mortgage-backed securities.

Here point to be noted is yield refers to returns generated by an investment. As MBS is having less returns hedge fund would remove it from portfolio and would add more profitable Treasury securities. This is clear strategy to earn more profit

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