From the text (referring to the nominal spread): "Moreover despite its limitations, this framework can be used across the entire credit-quality spectrum from Aaa’s to B’s. "
Several places in the text there is reference to the fact that the nominal spread framework works well across the entire quality spectrum and the allusion is that the swap framework, therefore, does not work across the entire quality spectrum.
Is the swap framework less accurate across credit qualities and, if so, why?
Edit and polite bump.
Swap spread framework is the best of all for credit spread. However it is a custom framework which may not be avl. for all maturities. So.ewbat intriguing is the fact for different qualities. You see, swap is essentily betn. two very high quality parties. The swap rate is essentially the credit spread, whicb u can imagine need not extravagant large. Hence there is practical limitation to using swap spread as a basis for credit spread.
Swap spread framework is the best of all for credit spread. However it is a custom framework which may not be avl. for all maturities. So.ewbat intriguing is the fact for different qualities. You see, swap is essentily betn. two very high quality parties. The swap rate is essentially the credit spread, whicb u can imagine need not extravagant large. Hence there is practical limitation to using swap spread as a basis for credit spread.
I don’t understand.
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Let’s say a 10-yr corporate bond is yielding 5%.
If the 10-yr US treasury is yielding 2.3%, the spread is 2.7%.
If a 10-yr swap with matching pmts is pay-fixed 3.5% receive LIBOR, the swap spread is 1.5%.
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How do the mechanics change if the corporate bond in question is AAA versus B?