What is spread duration?

Spread duration specifically refers to the sensitivity of the price of a fixed-income security or a portfolio of securities to changes in credit spreads. It quantifies how much the value of the bond or bond portfolio is expected to change in response to a 1 basis point (0.01%) change in the yield spread over a benchmark, typically government securities.

This sensitivity is particularly crucial for bond investors as credit spreads can fluctuate due to changes in credit risk perceptions, economic conditions, or market sentiment. By understanding spread duration, investors can better manage interest rate risk and credit risk in their portfolios, making it a vital tool for effective portfolio management, especially in environments where credit conditions may become more volatile.

The other options do not accurately define spread duration: the average duration of all bond types in a portfolio pertains to total portfolio duration, the average yield relates to yield calculations rather than duration, and measuring the duration of equity positions does not apply to spread duration, as it is focused solely on fixed-income instruments. Understanding spread duration allows investors to make informed decisions about the risk profile of their fixed-income holdings relative to changing market conditions.