Skip to content
All library documents

Estimating High-Yield Bond Returns from Spread Changes

Article Quant Q&A · Author: WantToLearnNewSkills
Read the original

Summary

The note gives a first-order way to estimate a high-yield bond portfolio’s return from a change in its credit spread: multiply the spread change by duration, with the sign depending on whether spreads widen or tighten. Its example uses a spread move of 20 basis points and duration of five years, yielding an estimated return move of 100 basis points in magnitude.

The response cautions that duration changes over time and says high-yield index duration can vary across a range. This makes the calculation an approximation rather than a complete daily return model. It omits other drivers such as carry, defaults, rate moves, convexity, and portfolio composition, and the question’s stated portfolio value is not incorporated. The method is most useful as a simple sensitivity estimate when spread duration and spread changes are available; it should not be treated as a full account of realized bond returns.

Key ideas

  • A first-order spread return estimate multiplies the spread change by duration.
  • Spread widening generally implies a price decline, while spread tightening implies a gain.
  • Duration varies over time, so the estimate should use an updated measure when possible.
  • The calculation omits other contributors to realized bond returns.

Tags

Fixed incomeRisk managementStatistics
Full text
# Calculation of Bond returns


# Calculation of Bond returns












Given that I have a portfolio of High yield bond with USD 50.

## Answer by VanillaCall (score 0, accepted)

https://quant.stackexchange.com/a/45179

Return is duration times change in spread. You have daily data so if the change in yield between two days is 20 basis points and the duration is 5 then the daily return is 100 basis points. One thing to be careful is duration changes over time particularly for the HY index which ranges from 4 - 6 years if I recall correctly.

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.