Decomposing Bond Total Return into Yield, Curve Roll, and Spread Effects

Summary

The discussion explains a first-order way to think about a bond’s return over a holding period: combine its yield with the price effect of changes in yield, scaled by the bond’s DV01. Roll-down return is a special case of that price effect, calculated under the assumption that the yield curve stays unchanged as the bond ages. For example, the bond is valued at the yield associated with its shorter remaining maturity on the original curve.

The answer cautions that realized yield changes generally differ from this constant-curve assumption, so roll-down is not a guaranteed component of actual return. A second response frames credit-bond return in terms of carry, mark-to-market changes in option-adjusted spread, and the cost of bonds that fall from investment grade when the mandate restricts holdings to investment grade. These are concise conceptual decompositions rather than a full derivation; they do not address reinvestment, financing, or other return components in detail.

Key ideas

• A bond’s first-order holding-period return can be approximated by yield plus the price effect of yield changes.
• DV01 translates a yield move into an approximate bond price move.
• Roll-down assumes the yield curve remains constant while the bond moves to a shorter maturity point.
• Actual yield changes may differ from the curve-based roll-down assumption.
• Credit-bond return can also reflect spread changes and the cost of downgrades below an investment-grade mandate.

Tags

# Roll Returns vs Total Returns


# Roll Returns vs Total Returns












Very basic question I'm confused about :

Is there a formula that relates total return of a bond as a function of yields and its roll down returns?

I mean ignoring reinvestment risk, would the total return of a bond be roll down return + yield?

## Answer by dm63 (score 3, accepted)

https://quant.stackexchange.com/a/46475

Yes I think you can say that the total return for a bond over a period equals to first order the sum of

A) yield

B) change in yield over the period * dv01 of the bond.

The question is, what assumption to make about the change in yield. The term roll down pnl is usually defined to mean that the yield curve remains constant over the period. For example, if it’s a 5yr bond and the period is one month, then the yield of the bond at the end of the period is equal to the yield of a 4yr11mo bond at the beginning of the period.

Of course the actual change in yield will not in general be equal to the above calculation.

## Answer by Vitomir (score 1)

https://quant.stackexchange.com/a/46428

Total return approximately equal to the sume of three components:

- issue OAS + rolldown = carry

- mark to market OAS

- falling angel cost if you are investing IG-only

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.