18. There’s a bit of “sleight of hand” here. High-grade bonds exhibit less yield volatility than those of high-yield bonds only as long as the bonds remain high-grade. If a firm’s credit worthiness deteriorates dramatically, possibly due to business cycle factors, it enters the speculative-grade region, and becomes high-yield. Its resultant yield volatility won’t show up in the statistic covering high-grade volatility, yet it should.

19. A further implication of this conclusion concerns hedging. Hedging involves the “short” sale of a security (or derivative) to protect against a possible decline in price of a security owned in the portfolio. A hedge is successful to the extent the instrument used as the hedge is correlated with the security being hedged against. This way a price decline in one is offset by that of the other. Our analysis tells us that Treasury bonds may be useful for hedging high-grade corporate bonds, but are a poor hedge for high-yield corporates.