Breakeven spread

[LTD]

Hi,
please clarify.
- When to use MINUS before duration and before spread in formula? Does it change smth? US bond yield 10 % (duration 1) , UK 1 % (duration 10)….
= (- or +) 9/ (- or +) 10 =0,9…= US bond yield SHOULD increase by more than 90bps (its price must fall) to wipe out yield advanage over UK?
- If we take duration of UK, not US bond, shouldn’t we relate yield changes to UK bond somehow?…
Thanks

 

[MrSmart]

%Spread (higher bond) = -Duration * x%
Where x is the change in interest rates (new-old)
That’s the formula for parallel shifts on price, just replace %price with %spread, and solve for x (which used to be 100bps)

 

[LTD]

ok according my example
%Spread (higher bond) = -Duration * x
9 % = - 10 (UK duration) * … x is 0,9
Yes… but how we can relate it to decreasing US bond price, if we take duration of UK in the formula…

 

[MrSmart]

You are using the spread of the higher bond, then use the duration of that same bond, to calculate the change in interest rates that would wipe out the difference.
The change is 9% upward shift.