The sensitivity of corporate bonds and loans
By admin, November 10th, 2009,in business tips, economy, loans guide, money issues, revenue »Tags: crisis, foreclosure, loans, mortgage, trade value | Comments Off
The sensitivity of corporate bonds to the economic environment essentially depends on their time to maturity. In the short term, default risk for investment grade corporate issuers is primarily due to nonsystematic factors, for example, cases of fraud or litigation. Over longer term horizons, conversely, systematic factors tend to have a higher impact on the default probability of corporate issuers. Changes in the economic environment and business risks in the sense of adverse industry trends or increasing competition are major drivers of credit risk and hence for spreads in the longer term. Therefore, one would expect the spreads of long and intermediate investment grade corporate bonds to be more sensitive to indicators of economic activity than short-term bonds. This implies that credit curves should flatten when the economic outlook improves. Rising confidence in the corporate sector additionally spurs investors’ willingness to take on more spread duration. Consequently, in periods of spread tightening investors should expect credit curves to flatten. In other words, the slope of the credit curve and the level of credit spreads are positively correlated for investment grade issuers.