The yield spread is defined as the difference in yields between a U.S. Treasury and an otherwise equivalent Baa rated corporate bond. The yield spread is the compensation to investors for bearing default risk and it varies over time, peaking in recessions. Following the financial crisis, the spread peaked in the Fall of 2008 at 611 basis points (bps) or 6.11%. If you had anticipated that the spread had peaked, then what positions would you have taken in the two

long treasuries, long Baa

short treasuries, long Baa

short treasuries, short Baa

long treasuries, short Baa