Corporate Bonds

October 21st, 2008 3:36 pm | by John Jansen |

The corporate bond market is a broken shattered vessel and a shoddy reminder of its once mighty and powerful self. It is beginning to resemble the statue of Ozymandias which Shelly described in the poem of that name as “a colossal wreck”.I wanted a dramatic opening as some benchmark corporate issuance today needed dramatically wide spreads to clear the market. Pepsico (an AA2 issuer) tapped the market for $2bilion 5 year notes and $1billion 10 year notes.

The 5 year issue had been trading in the secondary market at around a 260 spread to the 5 year Treasury. The issue priced at T+ 4 3/8 percent.

The 10 year issue had been trading at a spread of about 270 basis points to the 10 year Treasury. The issue priced at T+ 4 ¼ percent.

Each issue required a gigantic concession to where outstanding paper was trading to successfully clear the market. So the 5 year priced nearly 180 basis points cheap to outstandings and the 10 year traded about 155 cheap to comparable paper.

This is for the debt of a company which sells junk food and owns restaurants frequented by the ubiquitous Everyman. This is a company miles from the turmoil of the financial markets.

So, the real story here is that while one can raise $3billion, the issuing entity pays a very steep price for doing so.

Regular readers know that I have enjoyed chronicling the American Express 5 year note. It continues to sag. A dealer indicated a quote a few minutes ago at a new record wide of 820/770.

The General Electric 10 year deal which I also observe is 445/425 and that is about as wide as I have seen that bond.

Repair and rehabilitation may be occurring elsewhere in the credit markets, but it does not seem to have spilled into the corporate bond market.

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  1. 6 Responses to “Corporate Bonds”

  2. By JPHouston on Oct 21, 2008 | Reply

    wow. when good corporates have to borrow at 8% and financials at 12%…. somebody please tell me what happens to real estate cap rates? i bet they get above 10% ..fast! …wiping out the bottom 1/3 of REITs.

    wow.

  3. By David Merkel on Oct 22, 2008 | Reply

    This is why I am unconvinced by the bailout measures. With the new-issue corporate bond market seeming like frozen tundra, only the best names can get deals done at abysmal rates. There is no way that the Government can deal with that, nor should they.

    I have a rule of thumb to avoid equities when earnings yields are 4%+ less than 10-year BBB bond rates. I can’t really tell if we are at those levels now, but we are probably close. It may be time to sell stocks, and buy bonds. (It hurts to say that.)

  4. By John Jansen on Oct 22, 2008 | Reply

    One of the fellows with whom I regularly speak ( and who is regularly quoted here anonymously)is a portfolio manager and he makes that point quite often. At these levels bonds are cheap and it will be daunting task for stocks to rally in that environment.

    Thanks for your comment and I wissh I had thought of frozen tundra myself!!

  5. By Bond newbie on Oct 22, 2008 | Reply

    John, Pepsico has not “owned restaurants frequented by the ubiquitous Everyman,” as you write, for many years. They are purely product now: beverages (including juices and water) and salty snacks.

    Link to Hoover’s description of PEP’s business:
    http://www.hoovers.com/pepsico/–ID__11166–/free-co-profile.xhtml

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