Fixed Income Credit Strategies

Question 1

Spread duration

Answer 1

More relevant to investment-grade bonds. Percentage increase in bond price expected for a 1% decrease in credit spread (or vice versa).

Question 2

Empirical duration

Answer 2

measures interest rate sensitivity that is determined from market data. A common way to calculate a bond’s empirical duration is to run a regression of its price returns on changes in a benchmark interest rate. For example, the price returns of a 10-year euro-denominated corporate bond could be regressed on changes in the 10-year German bund or the 10-year Euribor swap rate.

Question 3

I- spread

Answer 3

like G spread, but Instead of using yields on government bonds as benchmark rates, the I-spread normally uses swap rates that are denominated in the same currency as the credit security.

For a credit investor, a key advantage of using swap rates over yields on government bonds is that swap curves may be “smoother” (less disjointed) than government bond yield curves. Government bond yield curves are sometimes affected by supply and demand for specific government bonds, especially on-the-run issues. Exhibit 5 shows the relative smoothness in the US dollar swap curve (solid line), which is based on Libor, compared with the US Treasury yield curve (dotted line) on 13 April 2016.