Credit analysis is the most important determinant of relative bond performance. I thought interest rate management was the most important determinant of bond performance? Is interest rate management not relative bond performance measure? Can someone explain. -Thanks.
My interpretation: Changes in interest rates impact different issues similarly. So the relative aspect has to come from somewhere else, e.g. credit risk.
“the most important” is pretty empty. Maybe credit analysis is the most important determinant of relative bond performance that you can do anything about (since predicting interest rate changes is essentially impossible).
Yeah, interest rate changes will affect bonds similarly, so if there are going to be relative changes in prices (i.e. one bond’s price changes more than another with similar duration), it’s going to come from: 1) Differences in credit quality (credit spreads) 2) Embedded options and convexity (callables, putables, MBS) 3) currency changes (for bonds in separate currencies) There might be mispricings due to supply and demand and other random things, but these are the things that will systematically affect the relative performance of bonds. (This list isn’t necessarily exhaustive; but it’s what I could think of right here)
But 0) Duration is #1 in my book too Edit: I guess I just posted that 0 = 1 on AF. Need coffee
OK, I see what you mean. If you have two bonds of different duration, then the duration difference will be the most important determinant of relative price changes. That makes sense. Something about the context of this discussion made me think that we were saying “other than duration.” Presumably the quote “Credit analysis is the most important determinant of relative bond performance,” was written by someone who was trying to justify an article about credit analysis.
Oh… OK… duration has to be in the list. Darn it…
bchadwick Wrote: ------------------------------------------------------- > OK, I see what you mean. If you have two bonds of > different duration, then the duration difference > will be the most important determinant of relative > price changes. That makes sense. > > Something about the context of this discussion > made me think that we were saying “other than > duration.” Presumably the quote “Credit analysis > is the most important determinant of relative bond > performance,” was written by someone who was > trying to justify an article about credit > analysis. No kidding. I think we all know what the guy who wrote that does for a living.