Reversion Quality Spread % Yield Spread What is the difference between the typical mean reversion spread analysis and quality spread analysis? Also, I remember readin somewhere that the % yield spread is not effective, as it just uses corporates/Treasuries ratio? Any help is appreciated. Thank you.
mean reversion: u expect it to go back to mean… if spreads widen… u expect them to narrow… so u buy that quality s , is the spreads do to quality of the underlying, low quality has obviously higher spread % yield ignores other factors
Just to add a couple points Revision = spreads will return to their long term average. If spreads have decreased for instance further than their historical mean for a given bond or bond class it may be a candidate for purchase (outperform, due to spread tightening). Quality can be used to analyze weird spread patterns. % of yield you examine an absolute spread, not a relative one, this gives you a gauge on if it’s truly blown out, or just relatively high, but not really.