Corporate Bonds
October 2nd, 2008 11:44 am | by John Jansen |The IG 10 spread is trading 186/188. I did not obtain a closing quote on this yesterday but it opened around 170.
Insurance company bonds are getting spanked as Harry Reid demonstrated that he sorely lacks financial markets savvy with his senseless comment that there is an insurance company on the verge of bankruptcy. CDS on insurance company names blew out by 150 basis points this morning.
Met Life cash bonds are 25 basis points to 50 basis points wider.
The market in my opinion is on the verge of ceasing to function. Here is an example. I have followed the saga in this space of the most recently issued 5 year American Express bond. It is a scary story. The bond was issued on a Friday in August at a spread of 4 3/8 percentage points over the 5 year Treasury. That was a shocking event as the company was forced to pay over 100 basis points more than the levels at which outstanding Amex paper was trading. But that is what they needed to do to get the deal done.
The paper was on a relative value basis cheap and it began to gradually edge tighter. The most expensive level which I had observed was 370 basis points over the 5 year note. That was just before this latest iteration of the crunch erupted.
Earlier this week the issue was about 500 basis points cheap to the benchmark Treasury.
Just several minutes ago as I prepared to write this I spoke with one of my regular corporate bond sources and he said that his firm was actually offering $4million of this bond at 650 basis points over the 5 year Treasury.
The market in my mind is on the verge of shutting down. There is sand in the gears and the machine is about to break down on the side of the road.
It is nearing the time when my next post will be an obituary for the fixed income market.
9 Responses to “Corporate Bonds”
By Alex on Oct 2, 2008 | Reply
Re: AmEx — Must be very unprofitable to have customers who pay their debt off in full at the end of each month.
By SS on Oct 2, 2008 | Reply
Strong words.
Would you go for “Risk is being repriced to levels more reflective of economic conditions and historical risk profiles?” and that Treasuries are overpriced due to FUD creating the “illusion” that things are worse off than they truly are.
Or is it simply Armageddon and the modified Paulson Plan is useless — which we all pretty much knew anyway.
By tiger on Oct 2, 2008 | Reply
John,
I have a similar question to SS. Why do you think this will shut down? Are you simply extrapolating pessimism or are you outright predicting that everyone will be hoarding more & more capital so longs as banks are not explicitly well-capitalized?
By Koval on Oct 2, 2008 | Reply
CDX IG10 closed 174 yesterday and closed 168 on Tuesday.
By youcancallmebuffet on Oct 2, 2008 | Reply
all tradesmen are of the opinion w/o their trade the world would stop. banana is the foundation of the world according to the banana growers association. not sure what you find so extraordinaire axp default risk is 6.5%. heck, nowadays i would put that at 20%.
By David on Oct 2, 2008 | Reply
What exactly do you mean by “shut down” or “barely functioning”?
Just because bond prices have dropped or are volatile, doesn’t mean that the market is not function, right? Stocks are also dropping and volatile. Would you say that the stock is “functioning” better than the bond market? If so, why?
By SS on Oct 2, 2008 | Reply
Personally,
I think we’ll know a lot more after the bailout plan has been passed — hard to believe it won’t be with these numbers. The cynical side of me says investors are pushing the numbers out until Friday to get the deal done. After that, we’ll see a whipsaw to be remembered.
By Dividends Anonymous on Oct 2, 2008 | Reply
Even with the proposed plan from congress it’s going to take some time to get the credit markets unsludged. We’re not talking minutes, hours or days…likely weeks.
I think that is when the ultimate mispricings will occur, at least in high quality corporate bonds, but I’ll wait to see before committing any capital to my FI portfolio
By Bond Market Girl on Oct 2, 2008 | Reply
There was an interesting article in Bloomberg today about the major dealers not having capital to make markets like they used to…
This has contributed to a gapping out of spreads…
Maybe this is contributing to what you are seeing…
The bond markets have been around for centuries… take heart this beast isn’t going anywhere… just looks real ugly now…
BBG article…
http://www.bloomberg.com/apps/news?pid=20601109&sid=acbC3Jx9yDY4&refer=home