Why did high yield corporate bond ETFs tank during the great recessionYield Curve VolatilityWhat happens when bond price is less than the recovery rateYield for valuation of illiquid corporate bondImportance of z-spread in CDS-Bond Basis tradingIs it possible to use the YIELD() function in Excel to compute the yield of an Italian government bond?Fixed Income Trading IntuitionIntuitively, why does liquidity premium contribute to bond yield?Corporate Bond Yield CurveCalculating historical volatility and returns from bond yieldProving that YTM > Current Yield on Discount Bond
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Why did high yield corporate bond ETFs tank during the great recession
Yield Curve VolatilityWhat happens when bond price is less than the recovery rateYield for valuation of illiquid corporate bondImportance of z-spread in CDS-Bond Basis tradingIs it possible to use the YIELD() function in Excel to compute the yield of an Italian government bond?Fixed Income Trading IntuitionIntuitively, why does liquidity premium contribute to bond yield?Corporate Bond Yield CurveCalculating historical volatility and returns from bond yieldProving that YTM > Current Yield on Discount Bond
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My apologies if this is not mathematical enough for this outlet.
My understanding of the pricing of a bond ETF is that lowering interest rates drive the price up and increased risk of default drives the price down. I'm trying to wrap my head around the dynamics of what happened to high yield corporate bonds around the great recession. Looking at a few of them, they lost in the neighborhood of 50% of their value at the bottom of the curve, which is about the same loss as the S&P 500.
During this period interest rates went from 5.2% to near 0%. Absent changes in default risk, this would imply that the price should have gone up. Obviously default risk went way up during the recession, but wouldn't this price change essentially mean that the market was pricing in a >50% chance of default for the underlying bonds? That seems to me to be curiously excessive even given the environment at the time. Was default risk the only thing driving the loss of value, or were there other factors in play?
Bonus question: How would the recession have affected an ETF with a fixed maturation timeline, such as iShares iBond? How would maturation date relative to the recession have played a role?
fixed-income bond yield
asked 8 hours ago
Ian FellowsIan Fellows
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My apologies if this is not mathematical enough for this outlet.
My understanding of the pricing of a bond ETF is that lowering interest rates drive the price up and increased risk of default drives the price down. I'm trying to wrap my head around the dynamics of what happened to high yield corporate bonds around the great recession. Looking at a few of them, they lost in the neighborhood of 50% of their value at the bottom of the curve, which is about the same loss as the S&P 500.
During this period interest rates went from 5.2% to near 0%. Absent changes in default risk, this would imply that the price should have gone up. Obviously default risk went way up during the recession, but wouldn't this price change essentially mean that the market was pricing in a >50% chance of default for the underlying bonds? That seems to me to be curiously excessive even given the environment at the time. Was default risk the only thing driving the loss of value, or were there other factors in play?
Bonus question: How would the recession have affected an ETF with a fixed maturation timeline, such as iShares iBond? How would maturation date relative to the recession have played a role?
fixed-income bond yield
asked 8 hours ago
Ian FellowsIan Fellows
1113 bronze badges
New contributor
Ian Fellows is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
My apologies if this is not mathematical enough for this outlet.
My understanding of the pricing of a bond ETF is that lowering interest rates drive the price up and increased risk of default drives the price down. I'm trying to wrap my head around the dynamics of what happened to high yield corporate bonds around the great recession. Looking at a few of them, they lost in the neighborhood of 50% of their value at the bottom of the curve, which is about the same loss as the S&P 500.
During this period interest rates went from 5.2% to near 0%. Absent changes in default risk, this would imply that the price should have gone up. Obviously default risk went way up during the recession, but wouldn't this price change essentially mean that the market was pricing in a >50% chance of default for the underlying bonds? That seems to me to be curiously excessive even given the environment at the time. Was default risk the only thing driving the loss of value, or were there other factors in play?
Bonus question: How would the recession have affected an ETF with a fixed maturation timeline, such as iShares iBond? How would maturation date relative to the recession have played a role?
fixed-income bond yield
asked 8 hours ago
Ian FellowsIan Fellows
1113 bronze badges
New contributor
Ian Fellows is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
My apologies if this is not mathematical enough for this outlet.
My understanding of the pricing of a bond ETF is that lowering interest rates drive the price up and increased risk of default drives the price down. I'm trying to wrap my head around the dynamics of what happened to high yield corporate bonds around the great recession. Looking at a few of them, they lost in the neighborhood of 50% of their value at the bottom of the curve, which is about the same loss as the S&P 500.
During this period interest rates went from 5.2% to near 0%. Absent changes in default risk, this would imply that the price should have gone up. Obviously default risk went way up during the recession, but wouldn't this price change essentially mean that the market was pricing in a >50% chance of default for the underlying bonds? That seems to me to be curiously excessive even given the environment at the time. Was default risk the only thing driving the loss of value, or were there other factors in play?
Bonus question: How would the recession have affected an ETF with a fixed maturation timeline, such as iShares iBond? How would maturation date relative to the recession have played a role?
fixed-income bond yield
fixed-income bond yield
asked 8 hours ago
Ian FellowsIan Fellows
1113 bronze badges
New contributor
Ian Fellows is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 8 hours ago
Ian FellowsIan Fellows
1113 bronze badges
New contributor
Ian Fellows is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
edited 8 hours ago
Ian Fellows
asked 8 hours ago
Ian FellowsIan Fellows
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New contributor
Ian Fellows is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 8 hours ago
Ian FellowsIan Fellows
1113 bronze badges
asked 8 hours ago
Ian FellowsIan Fellows
1113 bronze badges
1113 bronze badges
New contributor
Ian Fellows is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
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add a comment |
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1 Answer
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During the recession, when rates fell towards zero, we're talking about Treasury yields. The yield of a high yield bond is comprised of the Treasury yield and credit spread so even though Treasury yields fell, the credit spread widened much more which is whe prices fell sharply.
answered 6 hours ago
VanillaCallVanillaCall
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Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
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1 hour ago
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1 Answer
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1 Answer
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$begingroup$
During the recession, when rates fell towards zero, we're talking about Treasury yields. The yield of a high yield bond is comprised of the Treasury yield and credit spread so even though Treasury yields fell, the credit spread widened much more which is whe prices fell sharply.
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
$endgroup$
$begingroup$
Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
$endgroup$
– Ian Fellows
1 hour ago
add a comment |
$begingroup$
During the recession, when rates fell towards zero, we're talking about Treasury yields. The yield of a high yield bond is comprised of the Treasury yield and credit spread so even though Treasury yields fell, the credit spread widened much more which is whe prices fell sharply.
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
$endgroup$
$begingroup$
Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
$endgroup$
– Ian Fellows
1 hour ago
add a comment |
$begingroup$
During the recession, when rates fell towards zero, we're talking about Treasury yields. The yield of a high yield bond is comprised of the Treasury yield and credit spread so even though Treasury yields fell, the credit spread widened much more which is whe prices fell sharply.
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
$endgroup$
During the recession, when rates fell towards zero, we're talking about Treasury yields. The yield of a high yield bond is comprised of the Treasury yield and credit spread so even though Treasury yields fell, the credit spread widened much more which is whe prices fell sharply.
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
answered 6 hours ago
VanillaCallVanillaCall
5102 silver badges16 bronze badges
5102 silver badges16 bronze badges
$begingroup$
Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
$endgroup$
– Ian Fellows
1 hour ago
add a comment |
$begingroup$
Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
$endgroup$
– Ian Fellows
1 hour ago
$begingroup$
Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
$endgroup$
– Ian Fellows
1 hour ago
$begingroup$
Thank you for taking the time to respond. Perhaps you could expand on this a bit. If the credit spread widens then absent default risk, wouldn't that make the underlying bonds more attractive (i.e. valuable)? That is unless the bonds were callable and called by the issuer.
$endgroup$
– Ian Fellows
1 hour ago
add a comment |
Ian Fellows is a new contributor. Be nice, and check out our Code of Conduct.
Ian Fellows is a new contributor. Be nice, and check out our Code of Conduct.
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