Understanding Swiss credit risk through DTS

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.

This material is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This material is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this material nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.