Final answer:
The price of the BBB rated 10-year corporate bond likely decreased due to the rise in U.S. Treasury interest rates but may have been somewhat offset by the narrowing of credit spreads.
Step-by-step explanation:
When considering the effect on the price of a BBB rated 10-year corporate bond, several factors must be considered: the change in U.S. Treasury interest rates and the change in credit spreads for corporate bonds. In this scenario, there's been a 1% increase in Treasury interest rates alongside a 25 basis point decrease in the credit spreads. Generally, bond prices and interest rates have an inverse relationship, meaning when interest rates rise, bond prices fall.
However, credit spreads reflect the additional risk premium that corporate bonds offer over Treasury bonds. The decline in credit spreads indicates an increased confidence in corporate bonds or decreased perception of their risk, which would tend to increase their price.
In this case, the bond's price would likely decline due to the overall increase in interest rates but not as much as it would have without the decrease in credit spreads. To determine the exact effect, one must compare the magnitude of the two effects: the general increase in market interest rates (negative effect on bond price) against the specific decrease in credit spread (positive effect on bond price).
Given that credit spreads narrowed by 0.25% while Treasury rates increased by a full 1%, it's likely that the net effect would still be a decline in bond price, but by a lessened amount due to the improvement in corporate bond's relative attractiveness.