Hello there!
I was wondering whether someone could explain to me in simple words why - economically speaking - the spread sensitivity of a TRS on a corporate bond is higher than the interest rate sensitivity. Or, in other words, why is the spread sensi of the TRS different to the one of its underlying?
My observation is derived from standard TRS pricing approaches that assume to consider probability weighted cash flows.
Any input would be highly appreciated!
Best,
alinghi
Serving the Quantitative Finance Community
Re: TRS sensitivities
To first order, the deltas should be the same - if the yield goes from 3% -> 3.01%, the price move is what it is , irrespective of whether the yield shift was due to the Treasury curve moving or the credit spread.
But there's a an extra effect that destroys the symmetry - as credit spreads move, the expected life changes (hazard rate increases). But I'd be surprised if this effect was significant for TRS below about 10 years.
But there's a an extra effect that destroys the symmetry - as credit spreads move, the expected life changes (hazard rate increases). But I'd be surprised if this effect was significant for TRS below about 10 years.