04 Credit Sights Total Return

Total Return

Price appreciation/depreciation + Coupon interest.

Excess Return

Return above or below a benchmark (typically a duration-matched US Treasury).

If a corporate bond returns 0.5% and a matched Treasury returns 1.0%, excess return = -0.5%.

Excess Return Example

Investors generate alpha/excess return by:

• Overweighting outperforming bonds/sectors.

• Underweighting underperforming bonds/sectors.

• Using curve positioning, sector allocation, or single-name bets.

Total Return Example 2022 US Investment Grade Index:

• Treasuries yields ↑ (due to Fed policy), spreads widened.

• Prices fell significantly.

• Average coupon (3.81%) couldn’t offset price loss → Negative total return.

Total Return Example Marathon Petroleum Bond (YTD through April 30th):

• Price rose from 92.40 → 95.84 = 3.7% appreciation.

• Accrued coupon ≈ 1.2%.

• Total return = 4.9%.

Excess Return Example US Investment Grade vs. 10-Year Treasury

• 10Y Treasury total return: +0.65%.

• IG total return: +0.16%.

• Excess return = -0.49%.

• Suggests IG spreads widened more than Treasury yield fell.

Excess Return Example Toyota Bond vs. IG Index

• Toyota bond return: +0.32%.

• IG index return: -0.26%.

• Excess return = +0.58%.

• Possible reasons:

  • Toyota spread tightened.

• Toyota had shorter duration, benefiting from front-end stability.

Example AIG Bond (2028) vs. 5-Year Treasury

• AIG total return: positive but lower than Treasury.

• Similar duration → underperformance likely due to spread widening.

Which of the following factors contributed to the negative total returns of the US investment grade index in 2022?

• Higher US Treasury yields and widened credit spreads.

• Lower credit spreads and higher bond prices.

• Higher coupon payments and stable bond prices.

• Lower coupon payments and bond price volatility.

• Higher US Treasury yields and widened credit spreads.

• Lower coupon payments and bond price volatility.

True or False: Excess return is the gain or loss relative to a duration-matched US Treasury or other benchmark

True

True or False: Total return includes only price appreciation and does not account for interest payments from corporate bonds

False