The Broken State of Corporate Bonds

I just had a long conversation with a portfolio manager at a large money manager whose specialty is corporate bonds. He laments the broken state of that market and does not see any quick fix on the horizon.

He noted that bid/offer spreads have become egregiously wide. It is very difficult to trade even $5million blocks of second and third tier names. By way of example he noted that he owns some BBB rated utilities from smaller sized deals and he said attempting to move that paper is almost folly. He also made the point that it has become increasingly difficult to get “runs” (price quotes) from dealers and in his opinion the information pipeline has diminished.

In his opinion, the first test of the market might come later this week or next week with a round of issuance. The first issuers are likely to be pristine non financial names such as UTX or John Deere. The test would be in how steep a concession these names would be forced to pay.

The financial sector has some serious need to raise money ahead of it. He thought issuers such as JPMorgan or Wells Fargo would come to market first and test the waters. He felt that the coupons which would attach to financial deals would be quite wide. If these deals stabilized, we will likely see issuance from fallen financial angels as they struggle to fund themselves.

The gentleman with whom I spoke made one final and interesting point. He noted that since around July 1 the IG 10 is approximately unchanged. However, the Lehman High Grade cash index has widened about 100 basis points during that period. There is an over reliance on the IG 10 and in his opinion the index does not reflect the underlying weakness of corporate bond spreads.

Comments

[fatcat:]

Wow,100bp spreads....another shoe that has gotten little attention...thanks Mr Jansen,like everyone else,my attention has been diverted...

2008 Sep 22 09:16 PM

[jmorace:]

What's the IG 10?

2008 Sep 22 10:24 PM

[Jas1:]

The IG 10 is a Credit Default Swap index of investment grade names.

2008 Sep 23 08:03 PM