The Search for Relative Value in Bonds
Financial Markets and Portfolio Management, Vol. 25, No. 1, pp. 95-106, 2011
Posted: 6 Apr 2011
There are 2 versions of this paper
The Search for Relative Value in Bonds
Date Written: January 8, 2011
Abstract
Comparing asset swap spreads across bonds is a widely used tool for measuring relative value. This approach leads portfolio managers to increase their risk exposure in ways that are not transparent. Credit default swaps are utilized to demonstrate that viewing wide asset swaps as an indicator of relative value is a mirage. The paper documents the empirical regularities in the term structure of credit spreads and spread volatilities that make this result possible. In addition, we present empirical evidence of the imprint made on corporate bond returns by the widespread use of the asset swaps data.
Keywords: Credit Default Swaps (CDS), Bond portfolio, Relative value
JEL Classification: G110, G120
Suggested Citation: Suggested Citation