Abstract
Despite high spread volatility, investment-grade credit portfolios have generated an average annual spread premium (returns net of U.S. Treasury returns and defaults) of 48 bps over the past 20 years. The authors show that relaxing a common portfolio constraint that requires selling downgraded bonds would have allowed investors to capture an average annual spread premium of 86 bps, with similar risk. Thus, adopting a downgrade-tolerant credit benchmark could generate a higher credit spread premium.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have