Corporate Bonds: Return of the Yield Whores

July 31st, 2009 3:00 pm | by John Jansen |

Corporate bonds are maintaining their firm bid and are 5 basis points to 10 basis points on the day. One salesman noted that anything spread more than 100 basis points over treasuries is probably 10 basis points tighter.

Colgate priced $ 300 million 6 year Treasuries at a yield of 3.176. That is advertised as a spread of 67 basis points. But here is the rub. It is 67 basis points over the 5 year Treasury and this is a 6 year bond.

There is an apples to orange mismatch here as with the steepness of the Treasury curve that is really only about 35 basis points to the comparable Treasury as the curve is worth about 32 basis points.

What makes that trade even more stupid (really stupid) is that at the pricing yield one could extend a year to the seven year point on the curve and own the 7 year treasury about even yield even yield to the Colgate Palmolive bond.

Safeway sold $ 500 million 10 year bonds today. The initial price talk was 175/180. The deal priced at 158 and is now 142 /138.

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  1. 2 Responses to “Corporate Bonds: Return of the Yield Whores”

  2. By Gary on Jul 31, 2009 | Reply

    … “That is advertised as a spread of 67 basis points. But here is the rub. It is 67 basis points over the 5 year Treasury and this is a 6 year bond.”

    More evidence of poor math skills pervasive through the US (see What if they ran Healthcare discussion) … or maybe we should stop beating around the bush and call a spade a spade… it is just plain and simple ***dishonesty***

    Problem is, we are mostly lying to ourselves

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    (yes, I know many leveraged accounts will hedge the 6yr Colgate bond with 5yr Treasuries … but how one hedges the bond is subjective. You could hedge with a barbell of 2s and 10s and “create” an even bigger spread, with better rolldown characteristics. Then again, real money accounts might compare against the 7yr Trsy as John suggested)

  3. By Griff on Jul 31, 2009 | Reply

    wonder if that “industry” wishes to distance itself from finance, you know, to preclude reputational risk

    pimp daddies and whores don’t need to be mixed with bankers…just governors / congressmen

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