Credit
Investment grade bonds
| Real return | Similar government bond + 0.8% +- 0.2% (intermediate duration) |
| Volatility | Similar governemnt bond + 4% +-1% |
| Correlation | Nonlinear to equities, high during crashes |
| Testfolio | VFSTX (vs VFISX) (short), VFICX (vs VFITX) (intermediate), VWESX (vs VUSTX) (long) |
| Inflation | Nominal and interest rate risk on the similar government bond |
Corporate credit can be thought of as the flipside of equity. According to the Merton model, equity is like buying a call option on the enterprise value. Then corporate credit is like selling a put on enterprise value.
In an index with varied debt/equity, we can see that corporate credit is similar to 20% of an equity put selling strategy (e.g. XYLD).
High yield bonds
| Real return | Similar government bond + 2% +- 0.5% (short duration) |
| Volatility | Similar governemnt bond + 10% +- 2.5% |
| Correlation | Nonlinear to equities, high during crashes |
| Testfolio | VWEHX (vs VFISX) (short) |
| Inflation | Nominal and interest rate risk on the similar government bond |
High yield bonds are basically just multiplied investment grade bonds.
Emerging market bonds
| Real return | Similar developed government bond + 2.4% +- 0.8% (intermediate duration) |
| Volatility | Similar developed governemnt bond + 16% +- 4% |
| Correlation | Nonlinear to equities, high during crashes |
| Testfolio | VEMHX (vs VFITX) (short) |
| Inflation | Nominal and interest rate risk on the similar government bond |
Emerging bonds are even wosse credit quality than high yield bonds, mutliplying even higher.
Private credit, Collateralized Loan Obligations, Floating Rate Notes…
Depending on the specifics these are generally some combination of interest rate risk/return plus credit rist/return.