How do I quantify the impact of a 50bp spread widening on my bond portfolio?

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AcadiFi · Accepted Answer

The first-order approximation uses spread duration. For each bond, the mark-to-market impact equals negative spread duration times change in spread times market value. If your $480M portfolio has a weighted-average spread duration of 5.8 years and spreads widen 50bp uniformly, the loss is approximately -5.8 x 0.005 x $480M = -$13.92M, roughly 2.9% of NAV. Spread duration differs slightly from modified duration because it isolates sensitivity to credit spreads holding the Treasury curve fixed. For more precision, add spread convexity: the second-order term is 0.5 x spread convexity x (spread change)^2 x market value, which partially offsets the linear loss for moderate moves. Also consider cross-effects: when spreads widen, underlying Treasuries often rally (flight-to-quality), so your total loss may be smaller than the spread-only estimate. Finally, 50bp parallel is a simplification; real widening is almost always non-parallel, with lower-rated names widening more (spread beta > 1). A BB bucket might widen 90bp when the IG index widens 50bp. For risk reporting, decompose into key-rate spread durations by tenor and sector to catch curve and basis moves. Our FRM Part I market risk videos cover spread duration computations on real portfolios step by step.

How do I quantify the impact of a 50bp spread widening on my bond portfolio?

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