Explain how the Lehman Brothers Intermediate Bond Index might increase one day while the Merrill Lynch High Yield Index decreases the same day.

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Explain how the Lehman Brothers Intermediate Bond Index might increase one day while the Merrill Lynch High Yield Index decreases the same day.

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These two indices use different bonds. This Lehman index uses Treasury bonds with medium terms to maturity.  The Merrill Lynch index uses high risk bonds.  When investors determine that there is more risk in the economy, the spread between the safer bonds (Treasuries) and riskier bonds (high yield) widen.  If risk in the economy is perceived to be declining, this spread will decrease. This question is an example of the spread widening.

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