When we talk about credit, we refer to the
likes of investment grade bonds (issued by more creditworthy companies), high yield bonds (issued by less creditworthy companies, but offering more return and income in exchange), and emerging market bonds.
As of January 15th 2016, the yield to
worst of investment grade bonds tracked in the S&P National AMT - Free Municipal Bond Index was a 1.8 % (tax - free yield).
The 19,000 tax - exempt municipal bonds tracked in the S&P Municipal Bond Infrastructure Index mainly consist
of investment grade bonds related to the transportation (roads, airports et al) and utility (water, sewer, power, resource recovery) segments of the market.
The long investment grade bond positions included in the index are designed to represent the more liquid
universe of investment grade bonds offered within the United States.
By taking short Treasury Security positions (of an aggregate dollar value not exceeding the aggregate dollar value of the fund's assets), the index seeks to mitigate the potential negative impact of rising Treasury interest rates («interest rates») on the
performance of investment grade bonds (conversely limiting the potential positive impact of falling interest rates).
Wexboy is nice enough to add almost a year to the average life expectancy of the old folks in his spreadsheet, and I think the proper discount rate is probably even closer to the risk - free rate (near zero these days...) than the
yield of investment grade bonds.
The short positions are not intended to mitigate other factors influencing the
price of investment grade bonds, such as credit risk, which may have a greater impact than rising or falling interest rates.
One example is ProShares Corporate Investment Grade — Interest Rate Hedged (IGHG), which tracks the Citi Corporate Investment Grade (Treasury Rate - Hedged) Index, a diversified portfolio
of investment grade bonds with a built - in hedge against interest rate risk.
Back in 2007, before the financial crisis, a portfolio
of investment grade bonds would have yielded comfortably over 5 %.
Back in 2007, before the financial crisis, a portfolio
of investment grade bonds would have yielded comfortably over 5 %.