We need to be able to measure the true risk of our portfolios – historically, one of the biggest challenges facing credit investors. Back in 2004 we developed an innovative method to do so based on the observation that the product of a bond’s credit spread and its duration – its DTS – accurately predicts its future volatility. Now widely used throughout the industry, our DTS technique has found its way into all aspects of how we manage our credit portfolios at Robeco and has been pivotal in our success in this field.
Bonds with a long duration are more volatile than those with a short duration. Also, bonds with a high spread are more volatile than those with a low spread. To make a good assessment of the real risk of a bond we need to consider both aspects. This concept is the foundation of our credit risk model.