Spread Duration

A corporate bond's price can move for two separate reasons: interest rates in general shift, or the market's view of that specific issuer's creditworthiness shifts. Standard duration only measures the first. Spread duration measures the second — and for a portfolio of investment-grade or high-yield bonds, it's frequently the bigger driver of day-to-day price swings, since credit spreads move on company-specific and sector news that has nothing to do with the Treasury curve.

Definition and formula

For most fixed-rate bonds, spread duration is numerically close to — often assumed equal to — a bond's regular (effective) duration, because a bond's price responds the same way to a 1 bp move whether that basis point came from the risk-free rate or from the spread. The distinction matters is in what you're allowed to isolate:

$$\%\Delta P \approx -SD \times \Delta s$$

In words: the percentage change in a bond's price is approximately minus its spread duration times the change in its credit spread (in decimal, e.g. 0.0001 for 1 bp). A bond with spread duration of 6 loses about 0.06% of its price for every 1 bp the spread widens.

Floating-rate notes are where spread duration and interest-rate duration genuinely diverge: a floater's coupon resets with rates, so its rate duration is near zero, but its spread duration — its sensitivity to the issuer's credit risk — stays close to its full time-to-maturity, because nothing in the coupon reset compensates for a change in credit quality.

Worked example

A 7-year corporate bond has a spread duration of 6.1 and is priced at par ($100). Its spread widens from 150 bps to 175 bps — a 25 bp move — after a disappointing earnings report raises doubts about the issuer's leverage. The price impact is approximately $-6.1 \times 0.0025 = -1.525\%$, or about $1.53 per $100 face value, dropping the bond to roughly $98.47 — with the Treasury curve, and therefore the bond's rate duration, untouched throughout.

What this means in practice

Portfolio managers use spread duration to size credit hedges (like buying CDS protection) that offset spread risk without touching interest-rate exposure, which is usually hedged separately with rate instruments like Treasury futures. A fund's total spread risk across all its holdings is commonly summarized as spread duration times market value, weighted up to the portfolio level, to answer "how much do we lose if credit spreads widen 10 bps across the book."