What is the difference between yield and spread in this context? What is the significance of this statement on page 99 of vol 4. " bond manager can pick up yield on a trade, but on a relative value basis underperform an alternative issue with a lower yield over the manager’s investment horizon"
as i understand, AA bond has a yield of 93bp and BB bond has a yield of 98bp. so if you look from only ‘yield’ point, BB will provide a higher yield. but say, spreads on AA contract while those for BB stay constant. AA bonds will appreciate in price from spread contraction to offset some of the yield advantage of BB bonds. on a total return basis, if price appreciation is substantial, it is possible for AA bonds to outperform BB bond on a total return basis.
make sense to me. BTW, why is it called “pickup”? I lack of intuition on this.
my understanding is that your making the trade based on “picking up” additional yield. I.e. a bond yielding 90bps over treasuries vs one yielder 80bps over treasuries. But by making this your decision rule, your ignoring other aspects of return, so on a total return basis you may well lose.
my guess as to why its called pick-up … mabe becoz yield is the income component that an investor enjoys. he picks up gain … he picks up yield.
Do you feel the breakeven spread analysis on P138 is kind of along the same lines?