Fear Strikes Out: The Fractured State of the Corporate Bond Market

Fear Strikes Out was a mid 1950s-vintage movie which starred Anthony Perkins and Karl Malden. It chronicles the story of baseball player Jimmy Pearsall, who conquered his demons and achieved success in baseball. I mention that title because fear has not struck out in the bond markets but, to stretch the baseball metaphor, has hit for the cycle. (To hit for the cycle is a rare event as it requires a batter to hit a single, double, triple and home run in the same game.)

Here is today’s version of fear running rampant. National Rural Utilities is a cooperative for small rural utilities and functions as the financing vehicle for its members. They chose to tap the market today for $1billion 10 year notes. The issue is essentially a collateralized first mortgage bond and the company carries an A1/A+ rating.

For the privilege of offering $1billion of bonds in this environment, the company got saddled with a 10.50 percent coupon. There are no comparable securities to measure against, but corporate bond aficionados with whom I converse engaged in some prestidigitation with CDS and the swaps curve and they tell me that this bond is probably about 300 basis points cheap to where it should be versus Libor.

So once again we have a clear example of the fractured state of the corporate bond market.

The IG 11 is closing the day around 221.

The GE September 2018 issue is about where it was yesterday at this time and is quoted 460/440.

The Pepsico 10 year is 385/375 and little changed from yesterday and still much better than the 4 ¼ percent pricing spread.

My favorite bond, the American Express 5 year, is 840/790.

Comments

[User 284702:]

Why are we so sure that Nat Rural is such a fine credit? Are we relying on their rating?

2008 Oct 23 05:28 PM

[Alex_G:]

John,

I can't find any info on the National Rural Utilities bond deal, do you have any other info on the deal, cusip, etc?

thx,
Alex

2008 Oct 23 08:48 PM

[romang:]

But, this was expect as credit tightens so do ratings and the fear of default goes up.

2008 Oct 24 12:19 PM