Percent Yield Spread Analysis ?

[xingjian01]

Why it is said that
” the absolute level of the underlying benchmark yield is merely a single factor among many factors that determine the relative of the credit asset classs.These other factors can offset or reinforce any insights derived from percent yld spread analysis”
Don’t quite get this.

 

[cpk123]

when the underlying benchmark yield shifts upwards - credit spread contracts - but this alone does not signal that the credit class is underperforming.
The absolute level of the benchmark yield, demand, supply, probability of default - all must be considered as well to determine the relative value of the credit class.

 

[liming]

hi CP,
should the word “underperforming” be replaced with “outperforming” ? I guess contracikng credit spread should mean better performance?
when the underlying benchmark yield shifts upwards - credit spread contracts - but this alone does not signal that the credit class is underperforming.
thanks!
Liming

 

[cpk123]

you had a benchmark rate of 4%, your credit class returned 6%. Your spread = 2%
now the benchmark rate went up to 4.5% - you would have expected the credit class to return 6.5% - it did not - so your credit class did not perform as expected – your credit spread declined to 1.5%. Did it really mean your credit class “outperformed” or in this case - it has underperformed - but is it a real underperformance just based on the spread declining? That is the question being asked.