Extension risk:

Useful tools to use – Duration and Convexity measure

Easing liquidity can also result in a flatter yield curve or even an inverted yield curve. A flatter yield curve implies that the difference between short-term and long-term interest rates narrows. This can increase the risk of "extension" for investors who hold longer-term bonds in their portfolio. Extension risk refers to the risk that a bond’s maturity is extended as interest rates decline, potentially delaying the return of the principal.

The portfolio should be rebalanced by maintaining short-term bonds at the threshold level and investing in long-term bonds with large coupons. This will lower the danger of Extension Risk.

Reinvestment risk:

Useful tools to use – Find and act on Call/Put bond.

Lower yields resulting from easing liquidity can also create reinvestment risk for bond investors. If existing bonds mature or are called early, the investor may need to reinvest the proceeds at lower interest rates. This can reduce the overall yield of the bond portfolio over time.

If a bond portfolio has a large coupon and a call option, then the issuer will almost certainly exercise the call option. Immediately replacing it before the issuer calls it in for redemption.

If a big coupon put option-enabled bond is available on the market, increasing the return on bond portfolios may be accomplished by locating the bond and adding it to those portfolios.

Credit spread compression:

Useful tools for finding and replacing most safe bonds with somewhat risky bonds.

Easing liquidity measures can lead to increased risk appetite among investors and a search for higher yields. As a result, there may be a compression of credit spreads—the difference in yields between riskier bonds (e.g., corporate bonds) and safer bonds (e.g., government bonds). This can benefit bond investors holding lower-rated bonds in their portfolio, as their prices may rise due to the narrowing of credit spreads.

Find a bond in the same rating bucket that has a modest credit rating risk profile (for example, AA Stable, AA Positive, or AA+ Negative in lieu of AA+ Stable and AA+ Positive). 

To rebalance the bond portfolio, government bonds should be replaced with corporate bonds while the threshold level is maintained.