What is a credit-duration swap and how is it used?

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AcadiFi · Accepted Answer

A credit-duration swap (or credit default swap index hedge combined with Treasury) synthetically separates credit spread exposure from rates exposure. Gains: pure credit-spread P&L without rate noise.

Construction: long the credit cash bond, short Treasury futures with matched dollar duration. Alternatively, use CDX indices which are inherently rate-independent (they pay quarterly fixed, but spread risk is the primary driver).

Example: Wesbourne Asset Management wants to take a directional view that IG corporate spreads will tighten 20bp. Position structure:

1. Long $50M portfolio of IG corporate bonds, avg duration 7.5, avg spread 125bp, yield 5.45%.
2. Short Treasury futures to neutralize rate risk: $50M × 7.5 / 8.2 (10Y UST future DV01) = $45.7M equivalent notional.
3. Net position: pure spread bet.

P&L for 20bp spread tightening:
- Bond gains: +20bp × 7.5 × $50M = +$750K
- Rate exposure: zero (hedged)
- Net: +$750K for 20bp tightening (1.5% on $50M capital).

Alternative using CDX IG: sell $50M 5-year CDX IG protection at 68bp. If index tightens to 48bp, MTM gains = 20bp × $50M × 4.3 duration = +$430K. Simpler to execute, zero funding, but basis risk to cash IG bonds.

Wesbourne chooses CDX for tactical view (12-week holding), cash bonds for strategic credit exposure (6-12 months). Combining, they run a spread-only book of +$150M that contributed 2.3% to 2025 returns vs. benchmark's 1.1% spread P&L — pure alpha from credit view without accidental duration bets.

What is a credit-duration swap and how is it used?

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