25

4

23

3.5

21

3

19 In the real world - The sensitivity to the sensitivity to interest rates increases as spreads compress for corporate debt.
REAL (empirical) Duration is highly convex at current levels of spread/yield (much more convex than analytical duration). Arrows show need to sell more and more TSYs to hedge IR risk as HY spreads (& yields) compress . HY Bond yield (%) (LHS)

2.5

17

2

15

1.5

13

11

1

TSY Duration hedge (adjusted for empirical sensitivity)

9

0.5

7
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

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