According to the CFAI curriculum, the most relevant considerations for investment grade bonds are interest rate risk, spread risk and credit migration.
OK.
Then in the Mt. Pleasent case scenario the following is correct:
“Spread changes are more pronounced during times of outflows in high-yield markets relative to investment-grade markets, particularly during times of stress”
Aren’t this two statements in contraddiction?
From my understanding, the CFAI might have given it in order of the highest to lowest factors that would affect value on IG bonds.
HY bonds are primarily affected by credit spreads.
ok, but what do you say regarding my question?
I’m not gonna say its in contradiction. Interest rate is the primary risk with IG bonds unlike HY which are mainly impacted by spread risks. The reason for that os HY bonds are issued by businesses with high CF risk leading to higher yields and if rates go up, their spreads widen due to the already perceived high risk making it expensive for such companies to raise debt in the future.
As I stated, the book says that INVESTMENT GRADE are more impacted by SPREAD RISK rather than HY!!!
First point of the summary about credit strategies:
Credit risk is usually the most important consideration for high-yield portfolio managers. For investment-grade portfolio managers, interest rate risk, spread risk, and credit migration (or credit downgrade) risk are typically the most relevant considerations.
Not High yield!
regarding my question I found out, it has to do with Spread Sensitivity to Fund Outflows, nothing else.
But check the point above!
Can you say that IG are more impacted by spread changes as they are coming from a lower spread, while HY have higher spread? I mean, if you have no beer in your body then you are more impacted by a change of one beer in your body compared to the fact if you already have ten beers circulating in your body, the eleventh will not much more difference.
Of course, spread is more sensitive for HY especially during stress time. But I think CFA treats this spread widening as default risk not spread risk.
Isn’t IG more sensitive?