Corporate Bonds

November 14th, 2008 5:03 pm | by John Jansen |

Corporate bond spreads as measured by the IG 11 are under a bit of pressure. That index had traded in a range between 180 and 200 but has broken down and of late and a recent quote made it 205/207.Sales persons report a quiet market today. The featured deal yesterday was the Time Warner offering of 5 year and 10 year bonds. The 10 year priced at T+525 and recently someone quoted the issue 510/490.

That two tranche offering yesterday pricedwith an inverted credit curve. As I mentioned the 10 year was T+525 but the 5 year issue required a wider spread to Treasury paper and that paper priced at T+590. This phenomenon is not confined to Time Warner but manifests itself in quite a few other names.

Traditionally, that would indicate that investors see a greater a chance for default sooner rather than later and require a wider spread to protect portfolios from that risk.

Conversations with market participants, though, lead to a different conclusion. The credit spread inversion is a function of demand for duration. There is much more demand for 10 year assets from insurance companies and pension funds and that demand is evident in the number of credits which experience the inversion.

Be Sociable, Share!
  1. 3 Responses to “Corporate Bonds”

  2. By Constantine on Nov 14, 2008 | Reply

    JJ wrote:

    “Traditionally, that would indicate that investors see a greater a chance for default sooner rather than later….”

    I’m not sure I understand this. Wouldn’t a near term default affect the long term bonds as well?

    The explanation given by market participants does make sense to me, though.

  3. By paul on Nov 14, 2008 | Reply

    and isn’t the overall yield offered still higher on the 10 year bond compared to the 5 year? so even though the spread is more it still seems like investors are being compensated more for holding the longer bond than the shorter bond (which intuitively I’d expect).

  1. 1 Trackback(s)

  2. Nov 14, 2008: PrefBlog » Blog Archive » November 14, 2008

Post a Comment