Fixed Income Curve And Spread Signals

I am a senior analyst at an asset manager in Japan interviewing for a sell-side fixed income research role in Tokyo. I want the interviewer to probe my bond math, especially duration, convexity, spread risk, and curve positioning, and I want to turn those mechanics into relative value views. Can you run a realistic technical interview for me?

Duration is the first-order price sensitivity to yield changes, so it tells me the approximate percentage price move for a small parallel shift. Convexity adds the second-order effect, which matters more when rate moves are larger or when comparing bonds with similar duration but different curvature. For a parallel shift, duration dominates the initial move, but convexity makes the realized price change less negative when yields rise and more positive when yields fall. For a twist, I cannot rely on one number, so I would look at key rate duration and the exposure around the part of the curve most relevant to the bond's cash flows.

I would say the bond with higher spread duration is more sensitive to credit spread tightening or widening, so it offers more upside if spreads compress and more downside if risk sentiment worsens. If the higher convexity bond also has similar carry and liquidity, it can be more attractive because it gives a better payoff in a large move scenario. I would favor it if I expect spread tightening and a stable rate backdrop. If I am worried about volatility or a spread shock, I would prefer the bond with lower spread duration even if the headline yield is a bit lower.

I would decompose total price sensitivity into interest rate duration and spread duration. For the rate side, I would use modified duration and key rate duration to isolate exposure to each point on the curve. For the credit side, I would look at spread duration, option-adjusted spread if there is embedded optionality, and asset swap spread or z-spread depending on the instrument. In a relative value pitch, I would compare carry, rolldown, spread pick-up, and hedge ratios. If the corporate has wider spread but much higher spread duration, I need to judge whether the extra carry compensates for the risk of spread widening.

For a steepener or flattener, I would first choose the segment where I think the move is mispriced and then size the position to be curve neutral on overall duration. In a 2s10s steepener, for example, I would be long the short end and short the intermediate or long end depending on the expression, with the weights set by DV01 so the trade is not just a directional rate bet. I would check the key rate duration profile to see whether the trade is actually exposed to the belly or the long end. The trade fails if the curve move is driven by a different sector than expected, if carry and rolldown work against me, or if the spread between the legs is affected by liquidity and auction effects rather than pure curve repricing.