Need help!

Hi, recently i just joined an asset management firm doing FOF.

But i am very confused regrading Credit strategies and how its works. i am thinking of getting CAIA for a start.

Could someone explain to me on the questions below and correct me if i am wrong.

  1. Yield, duration and maturities.

When the yield spreads widen, credit managers will say there are lot of opportunities. They buy HY products to earn the intersts returns? If yield tighten, they lose money?

  1. But isn’t a drop in yields mean price goes up which mean the porfolio is positive returns?

3.When a HY product in distress. (Rumoured to default) Can i say that spread of the securities dropped?

4.Durations. A mgr will buy durations only to hedge interest rate risk?

Sorry for the confusion. I am confused on understanding them as well.

Hope you guys can share your knowledge here.


  1. If spreads widen, it means that the yield on newly issued securities are going to be higher that the coupon payment of existing securities with the same characteristics, therefore there are more opportunities to get in the market higher yields as spreads widen. On the other hand, as spreads narrow, one would rather buy a risk-free security if the spread is too small and not worth the extra risk.

  2. Yes, it generally does. Referring to your previous question, widening spreads have the same effect of an INCREASE in interest rates in the securities a portfolio holds.

  3. No, the spread has widen. The spread is the difference in YTM of a risky bond over a risk-free bond. If the HY product becomes distressed, the price will decline, the YTM will increase, increasing the difference in yield between the HY product and the treasury.

  4. You don’t buy duration. Duration is the sensitivity of bond prices to changes in interest rates. If you have long duration (longer maturity bonds) you will be more exposed to interest rate risk. This may be helpful in case of expected decrease in interest rates. On the other hand, when you want to protect the portfolio from rising interest rates, you will want to have a lower duration, meaning that the bonds will mature sooner (and won’t change much in price as the principal repayment will remain the same at maturity) so you will be able to reinvest the proceeding (principal payments) in higher yielding bonds within a short time horizon.

This is really helpful. Thank you Andreavespa.

Appreciate your time replying this.