What is Spread Duration?
Spread duration measures the percentage price change for a 1 basis point change in the option-adjusted spread (OAS). While effective duration measures sensitivity to changes in the risk-free rate (Treasury curve), spread duration measures sensitivity to changes in the credit/liquidity premium. For most whole loans, spread duration is similar to effective duration, but they can diverge for floating-rate loans or loans with significant optionality. Spread duration is used for credit risk hedging and relative value analysis; it tells you how much your position gains or loses when credit spreads tighten or widen.
How LoanBook Uses Spread Duration
LoanBook reports spread duration alongside effective duration in the portfolio analytics. It is calculated by recalculating pool value at OAS ± 1bp and measuring the price change.
Frequently Asked Questions
When does spread duration differ from effective duration?
For fixed-rate whole loans, they are similar. They diverge for floating-rate loans (low rate duration but meaningful spread duration), loans with strong prepayment optionality, and complex structures where the credit spread component behaves differently from the base rate component.
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