Add a country OAS to a government bond model? (modelling returns of the bond price)

Question

when modelling the % returns on a government bond, I use a model like this:

$$\Delta P_t / P_{t-1} = \sum_i KRD_i (-\Delta y_i)$$

Does it make sense at all to add the following "country oas" component?

$$\Delta P_t / P_{t-1} = \sum_i KRD_i (-\Delta y_i) + \text{spread duration} (-\Delta OAS_{country, t})$$

So if our gov bond is US, we take a US denominated bond index with comparable duration to our bond and take negative difference of its oas at each time point and then add this component to our model.

This change will be incredibly small, but for some reason when I incorporate it into my model I get that a large part of risk stems from this component.

Answer 1

Yes, it someone does. The return of a bond is equal to initial OAS + mark-to-market OAS + rolldown + fallen angel cost.

Your use of spread duration can quite proxy for rolldown. If you are working with US, you can neglect the fallen angel cost.