CHAPTER 27The Bond-CDS Basis and a Fixed-Income Conjecture
I wrote in a previous chapter: “… [C]redit has some nice features. The price-to-hopefulness ratio is never a part of valuation. Few people have trouble parting with a bond when the price is right. There is a fuzzy but ever-present upside limit. There is a downside bounded by the recovery rate. There are simple opening lines: Acquiring higher yield implies taking more risk by (1) lengthening term risk, (2) taking more credit risk, (3) moving down the capital structure, or (4) some combination” (italics added).
This is a pretty provincial view of fixed-income trading, kind of like chess before Nimzovich. The key concept in modern stochastic fixed-income strategy is the rethink it requires ...
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