Darien

The noise in the manager's portfolio due to differences in pricing between otherwise identical issues is eliminated.

Say Corp A has credit rating BBB while Corp B has rating A , then for an identical maturity the two bonds would have different prices owing to different premium.

The only way to completely eliminate a premium due to credit rating would be to go to a default free instrument of identical maturity / duration .

The set of instruments/maturities chosen by the manager is repriced this way , i.e. we would substitute with a set of treasuries . Then compare to the "market" of default-free bonds ( proxied by entire treasury universe ) which serves as benchmark.

If the manager's returns on this basis outperform , then he is making good judgments on positioning his choices