The search for relative value in bonds: Asset swaps are a seductive, but incomplete, approach.
Grieves, Robin; Mann, Steven V
Asset swap spreads are a widely used metric for identifying relative value in bonds. We document that this approach breaks down because different benchmark credit curves have different slopes and spread volatilities. If credit default swaps augment the relative value analysis, portfolios return to their original spread duration exposures. Apparently disparate portfolios are returned to an approximately equal footing.
Conference: University of Otago, Department of Finance, Seminar, Commerce 5.37, University of Otago, Dunedin, Otago
Keywords: Asset swap spreads; relative value in bonds; benchmark credit curves