Fixed Income

Understanding Swiss credit risk through DTS

Understanding Swiss credit risk through DTS
Philipp Burckhardt, CFA - Fixed Income Strategist and Senior Portfolio Manager

Philipp Burckhardt, CFA

Fixed Income Strategist and Senior Portfolio Manager
Markus Thöny - Head of Swiss Fixed Income

Markus Thöny

Head of Swiss Fixed Income

The credit risk of a bond or entire fixed-income portfolio can be assessed in two ways: by analysing the likelihood of default, or by gauging the sensitivity of returns to changes in the spread of the instrument.

In this paper, we describe both approaches:

  • Default risk at the issuer, bond and portfolio levels can be measured by setting exposure limits based on the key characteristics of debt instruments, such as country, issuer, sector and credit rating.
  • To capture market-driven credit risk, interest-rate risk must first be isolated. Then a key metric – duration times spread (DTS) – is vital in calculations that ascertain the sensitivity of a bond’s returns to changes in its spread.

We then describe how DTS has evolved in the Swiss fixed-income market over the past decade, showing how fluctuations in this metric can be largely explained by changes in credit-risk premiums.

To read our paper, please use the download button provided.

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