Applied Research:

Credit Spreads: Quo Vadis? Stress-testing yield curves and corporate bond risk premia in anticipation of further Fed rate hikes

Author: Christoph V. Schon, Executive Director, Applied Research

Two recent surveys by the CFA Society of the United Kingdom and Bank of America Merrill Lynch reveal that the number of investment professionals worried about fixed-income valuations has increased significantly over the last couple of months. Investors are concerned how bond markets will react to further interest-rate hikes by the US Federal Reserve Bank. Two historical precedents now being discussed are the bond market sell-off of 1994 and the spread rally in the first few months of the hiking cycle of 2004. In this paper, we assess the potential impact of a number of possible scenarios (including those from 1994 and 2004) on a USD-denominated multi-asset class model portfolio, using the stress-testing capabilities of our Axioma Risk portfolio analysis platform.

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