Hi folks!
Is this statement accurate?
‘Relative to high-yield bonds, investment-grade bonds are more sensitive to interest rate changes and credit migration risk, resulting in credit spread volatility’
CFA says it is. I thought HY bonds are more sensitive to credit migration risk, and hence this would be an inaccurate statement.
Isn’t credit migration risk just the risk of your bond getting downgraded? How would HY be more sensitive to that? It’s already low credit quality, so there’s only so much room for the price to move.
An IG bond that downgrades to HY could see its price move from 90 to 30 (a move you are unlikely to see on the downside in a credit migration for a bond that’s already HY).
Credit migration risk - is credit related risk which is more important for HY
IG- interest rate risk is more relevant (not as much so the credit risk).
two different concept- credit risk (HY) vs. interest rate/spread risk (IG)
I disagree. Just because it’s credit related does not mean it’s more important for HY than for IG. Again credit migration risk is risk that the bond changes in credit quality. A buyer of HY isn’t as sensitive to that risk as a buyer of IG. Therefore I’d expect a larger impact on IG from downgrades and hence they’d be more sensitive.
So I agree with CFA on this one.
This is correct.
Correct… Investment grade bond is more sensitive to interest rate changes and the manager is more concerned about credit migration (which leads to widening of spread)…
i saw very similar statement in the CFA practice question: Relative to high-yield bonds, investment-grade bonds are more sensitive to interest rate changes and credit migration risk, resulting in credit spread volatility. High-yield bonds are not as sensitive to interest rates, and, given the potential for actual credit losses caused by default, monitoring outright market value of the position is more critical with high-yield bonds than with investment-grade bonds.