Credit Portfolio Management in a Turning Rates Environment

Abstract

We give a detailed account of correlations between credit sector/quality and treasury curve factors, using the robust framework of the Barclays POINT® Global Risk Model. Consistent with earlier studies, we find a strong negative correlation between sector spreads and rate shifts. However, we also observe that the correlations between spreads and Treasury twists reversed recently, which is likely attributable to the Fed’s ongoing quantitative easing. We also find that short-term effective durations in the banking industry are now significantly lower than historical patterns would indicate. Our findings are relevant for credit portfolio managers contemplating the impact of rising interest rates and steepening Treasury curve on corporate bond portfolios.

Keywords: portfolio management, credit risk