I find that approaching the same subject from a variety of angles is the best way for me to learn. While it leads to plenty of dead ends, sometimes a fresh perspective can illuminate a new path.
We've been attacking fixed income from a number of directions lately, and this week we're back with another analysis. But rather than explore a trading signal, we simply try to gain a deeper understanding of what drives fixed income movements.
More specifically, we break down the credit spread curve into statistical factors and fine three familiar faces (at least to those who are familiar with modeling yield curve changes): level, slope, and curvature.
We walk through the step-by-step analysis we perform to identify these factors and turn them into stylized portfolios. Once built, we track their performance over time to learn something about how credit has historically performed.
The results are nothing too surprising, but we think the details provide plenty to chew on. (PDF)
🎧 LISTEN: Flirting with Models – Benn Eifert – Volatility Investing (S2E2)
Read of the Week
→ SPREAD: "The paper proposes a new measure of spread exposure for corporate bonds portfolios based on a detailed analysis of credit spread behavior. We find that changes in spreads are not parallel but rather linearly proportional to the level of spread, whereby bonds trading at wider spreads experience larger spread changes." Dts (Duration Times Spread)
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