More Corporate Bonds

March 27th, 2008 2:04 pm | by John Jansen |

 I just spoke with a portfolio manager who runs some corporate bond money for a public entity and he had some wortwhile comments on the state of the corporate bond market.

He expects issuance to be on the heavy side as even though spreads remain wide the all in levels are quite low because of the prevailing levels in the treasury market. Those historically low levels should motivate corporate Treasurers to push paper through the pipeline.

Liquidity in the market place is still very spotty and impaired. He noted that broker dealers should drop the dealer part of that title as so much of the business which gets transacted is now done on an order basis. There is reasonable liquidity and activity in brokers, large banks and industrials. Hybrid paper,regional bank names, and REITS are sectors in which it is particularly difficult to move paper.

The new issue market constrains secondary market trading as so much of what is offered there comes at very large concessions to outstanding paper. As an investor one is much better served by waiting for the big new issue to surface rather than playing in a seemingly cheap secondary piece which can get trampled by the supply concession.

New issue paper also trades extemely cheap to single name CDS. In many instances new issues price 50 basis points to 100 basis points cheap to CDS.

The IG10 trades expensively also and he described it as a liquidity vehicle for players who wish to make a bet on the general condition of the credit markets.

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  1. 4 Responses to “More Corporate Bonds”

  2. By MW on Mar 27, 2008 | Reply

    “New issue paper also trades extemely cheap to single name CDS. In many instances new issues price 50 basis points to 100 basis points cheap to CDS.”

    AFAIK this ‘negative basis’ trade has been around for a while. It will continue to be available while balance sheets remain constrained.

    John, please can you clarify something for me – namely, what mean by “business which gets transacted is now done on an order basis”. Do you mean the desk is effectively matching limit orders rather than making markets?

  3. By John Jansen on Mar 27, 2008 | Reply

    In the old days a client would call up and say that he was trying to sell 10mm of XYZ paper and the dealer would put himself at risk with an outright bid. now there is a bit of a pow wow to dicover a price and then the dealer will search assiduously for a buyer to whom they can place the securities. The dealer is not interested in risk but truly brokers the transaction

  4. By MW on Mar 27, 2008 | Reply

    Thank you. Is this simply a function of the current market? I ask because banks seem to have been moving from a principal to an agency model for some time.

  5. By John Jansen on Mar 27, 2008 | Reply

    This is a recent development with recent defined as August 2007 when the meltdown began in earnest. Until then the large investment banks provided significant liquidity and had a healthy appetite for risk.i talked to a former customer today who works for a medium size public entity (a different entity than the one described in this posting) and he mentioned that they has tried to sell a small amount of a recognizable named investment grade credit and his sojourn took him to a dozen dealers,none of whom would make an outright bid.
    So it is ugly out there.

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