Can someone please explain why is spread duration more relevant for IG bonds while identifying optimal risk exposures for a portfolio?
I thought it would be more relevant to HY bonds since they are more susceptible to credit risk?
HY are credit risky that’s true but they aren’t as sensitive to changes in the credit spread. Think of changes in spread as changes in credit quality. IG is far more sensitive to changes in credit quality than HY.
HY is also typically short maturity. The spread duration is affected by time to maturity as well as overall credit risk.
Think of a 10 year IG spread widening from 100bps to 200bps versus a 3 year HY spread going from 700bps to 800bps.
since HY would have higher coupon rates, slight changes in credit spreads do not matter as much as to IG bonds which have lower coupon rates.
Makes sense. Thanks!