The findings of this study highlight a number of implications for managing credit portfolios. We have observed that the investment-grade vs. high-yield distinctions should be made when assessing correlations and credit risk diversification. As spreads on speculative instruments tend to be dominated by issuer specific factors rather than market-specific factors, bonds from the same issuer in different markets tend to be highly correlated; bond correlations across markets for high-grade issuers...

In a companion article, Oren Cheyette has described recent enhancements to Barra's global fixed income risk models. How is this research incorporated into Barra's applications? This article uses Barra's Cosmos system to illustrate how this new risk model is presented to users. For this case study, we will examine a hypothetical euro-denominated credit portfolio run by a French investment manager. The portfolio is a new EMU corporate bond mutual fund, and is initially funded with 10 million...