credit migration risk vs spread risk

CFA Level III
#1

I don’t get really the difference between the two.

Credit migration risk, is the risk that a Bond (higher for IG Bonds) experience a downgrade --> credit spread volatility From the CFA book:

“Because credit spread volatility—as opposed to outright credit default loss—is more relevant for investment-grade bonds, the risk in a portfolio of investment-grade bonds is typically measured in terms of spread duration.”

Where the spread duration is the change in bond price due to a change of credit spread.

So I understand that the credit spread volatility (Credit migration risk) is “measured” through spread duration. So credit migration risk = spread risk?

But then in the CFAI summary they say:

“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.”

Which means, that spread risk is something else than credit migration risk…?

#2

up

#3

Credit migration risk is due to adverse corporate news --> worse credit rating (e.g. declining debt service coverage ratio and worsening operating prospects).

Spread risk is spread widening due to macro events such as recession.

It’s possible to have great credit rating but high yield during bad times.

#4

Credit migration risk is in addition to credit spread risk. If a bond gets downgraded out of investment grade, its price will drop a lot more than implied by its credit risk (spread of course will map with the price) because of constraints imposed for many institutional investors (e.g., insurance companies) to not hold below investment grade bonds. This risk is therefore most severe for BBB (or similar) bonds.