Pockets of Value in Corporate, REIT Paper

I had a long chat with a former client who manages some corporate bond money for a large institutional entity. He notes that the corporate bond market has experienced a significant recovery in the two months since the Bear Stearns (BSC). Liquidity has improved significantly though the ability to buy and sell bonds has not returned to status quo ante, such that issues might trade with the same facility as they did before the unseemly and untidy events unfolded last summer.

There is still a dichotomy between the performance of the Index and cash bonds. Each has improved, but the cash has dramatically lagged the index. At its peak, he notes, the IG 10 traded at about 200 basis points and subsequently rallied back to about 80 basis points. (As we spoke this morning it was trading around 90.) The Lehman Investment Grade Credit Index, which measures the cash market, had traded as wide as 240 basis points at the worst of the debacle in March, has rallied and sits around 215 basis points.

The IG 10 has outperformed for two main reasons. It is a very liquid instrument and it is the quickest and cleanest way to make sizable bets on the direction of spreads. The cash index lags because the cash market is drowning under a veritable tsunami of issuance. Additionally, the Index is highly correlated to the stock market and the recent ebullience in equities energizes folks who tend to trade the index.

The new issue market is likely to remain “en fuego”. Demand is robust and new deals are hugely oversubscribed. He noted that there is an abundance of maturities later in the year as well as bridge loans which need to be termed out at some point. In his opinion avaricious investment bankers, hungry for a bungalow in the Hamptons, would be counseling corporate Treasurers to seize the day and issue now before the window of opportunity closes.

This particular portfolio manager thought that there are still pockets of value in the corporate bond market. At the moment he believes that large, diverse global financial institutions represent an island of relative value. He mentioned 10 year JPMorgan, in particular as something he likes. There is a JPM 6.00 Jan 2018 which trades around T+175. He suggests that this paper is ideal for a portfolio which can weather short term mark to market volatility.

The same gentleman also has a penchant for Reit paper in the 7 year to 10 year part of the curve. He offers the same caveat that it might be a rocky ride but feels that there are conservative names out there with unblemished balance sheets which should comfort an investor. His favorite names in that sector were Prologis (PLD) and Simon Properties (SPG).