switzerlanden
Duration Times Spread: a measure of spread exposure in credit portfolios

Duration Times Spread: a measure of spread exposure in credit portfolios

22-06-2019 | Research

Duration Times Spread (DTS) is the market standard method for measuring the credit volatility of a corporate bond. It is calculated by simply multiplying two readily available bond characteristics: the spread-durations and the credit spread. The result is a single number that can be used to compare credit risk across a wide range of bonds.

  • Patrick  Houweling
    Patrick
    Houweling
    Portfolio Manager

Speed read

  • The DTS concept was originally developed by Robeco researchers in the early 2000s
  • It has become the standard method for measuring the credit volatility
  • This measure can be used to compare credit risk across a wide range of bonds

Suppose we want to compare two very different bonds, where the spread durations are one year and 10 years, and the credit spreads are 500 bps and 50 bps, for bond A and bond B, respectively. Both have a DTS of 500 and therefore will have the same expected credit volatility.

DTS only predicts the credit risk of the bonds, not their default risk. In our example, investors clearly perceive bond A to be riskier, as its credit spread is the highest of the two bonds. To predict default risk, one could use credit ratings or distress risk measures, such as distance-to-default. Moreover, DTS does not say anything about interest rate risk, because it only predicts risk driven by credit spread fluctuations. To measure a bond’s exposure to changes in risk-free interest rates, an investor can simply use the interest rate duration.

The DTS concept has various advantages. First and foremost, DTS is a more accurate predictor of future volatility than methods previously used by investors. Second, DTS is very simple to calculate, which makes it easy for portfolio managers to use in their daily work. Third, changing market circumstances are reflected in the DTS: if credit spreads double from one day to the next, so does the risk estimate.

Why should one multiply duration and spread? Why not use another formula? One can easily prove that by using DTS as the risk measure, we assume that credit spreads move in a relative fashion rather than a parallel fashion. In our example, if the credit spread of bond A moves from 500 to 550 bps (i.e. a 10% increase), then the credit spread of bond B will move from 50 to 55 bps (also 10% increase), and not from 50 to 100 bps. Our empirical research shows that relative spread changes indeed reflect credit markets more accurately than parallel spread changes.

DTS was originally developed by Robeco researchers in 2003

DTS was originally developed by Robeco researchers in 2003. Shortly thereafter, we started using it to monitor the credit risk of all of Robeco’s credit portfolios. A joint project with Lehman Brothers led to the publication of the results in The Journal of Portfolio Management in 2007.1 DTS is now widely accepted among investors, and it has been implemented in leading risk management software, including MSCI RiskMetrics and Bloomberg Barclays POINT.

1 Ben Dor, A., Dynkin, L., Hyman, J., Houweling, P., Van Leeuwen, E., and Penninga, O., ‘DTSSM (Duration Times Spread)’, The Journal of Portfolio Management, 2007, vol. 33. no. 2, pp. 77-100

Download our research paper

Disclaimer:

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.

Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.

Logo

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree