An institutional portfolio manager holds a large position in long-duration BBB-rated Canadian corporate bonds. A sudden global liquidity crisis triggers a 'flight to safety,' causing benchmark Government of Canada yields to fall by 125 basis points, while credit spreads for BBB-rated issuers widen by 300 basis points. What is the impact on the portfolio?

Question

Accepted Answer

The total yield of a corporate bond is the sum of the benchmark and the spread. Here, the spread widening (300 bps) more than offsets the benchmark fall (125 bps), leading to a net yield increase and a loss.

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