Journal of Investment Strategies

Risk.net

Credit portfolio management in a turning rates environment

Arthur M. Berd, Elena Ranguelova and Antonio Baldaque da Silva

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 probably attributable to the Fed's ongoing quantitative easing. We also find that shortterm 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.

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