Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.
Yield is the income return on an investment.
An option-adjusted spread (OAS) measures the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option.
A subordinated bond ranks below other bonds with regard to claims on assets.
Additional Tier 1 (AT1) capital securities, issued by banks for regulatory purposes, typically offer higher yields than traditional bonds, but also carry higher risks if the issuing bank experiences severe credit problems.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Many countries in the European Union are susceptible to high economic risks associated with high levels of debt, notably due to investments in sovereign debts of European countries such as Greece, Italy and Spain.
The profitability of businesses in the financial services sector depends on the availability and cost of money and may fluctuate significantly in response to changes in government regulation, interest rates and general economic conditions. These businesses often operate with substantial financial leverage.
This article was written by Jacob Habibi, Senior Analyst, Mike Hyman, Head of Investment Grade Portfolio Management and Matt Brill, Senior Portfolio Manager.