Corporate Bond Market Grinding to a Halt

The IG 10 spread is trading 186/188. I did not obtain a closing quote on this yesterday but it opened around 170.an

Insurance company bonds are getting spanked as Harry Reid demonstrated that he sorely lacks financial markets savvy with his senseless comment that there is an insurance company on the verge of bankruptcy. CDS on insurance company names blew out by 150 basis points this morning.

Met Life cash bonds are 25 basis points to 50 basis points wider.

The market in my opinion is on the verge of ceasing to function. Here is an example. I have followed the saga in this space of the most recently issued 5 year American Express bond. It is a scary story. The bond was issued on a Friday in August at a spread of 4 3/8 percentage points over the 5 year Treasury. That was a shocking event as the company was forced to pay over 100 basis points more than the levels at which outstanding Amex paper was trading. But that is what they needed to do to get the deal done.

The paper was on a relative value basis cheap, and it began to gradually edge tighter. The most expensive level which I had observed was 370 basis points over the 5 year note. That was just before this latest iteration of the crunch erupted.

Earlier this week the issue was about 500 basis points cheap to the benchmark Treasury.

Just several minutes ago as I prepared to write this I spoke with one of my regular corporate bond sources and he said that his firm was actually offering $4million of this bond at 650 basis points over the 5 year Treasury.

The market in my mind is on the verge of shutting down. There is sand in the gears and the machine is about to break down on the side of the road.

It is nearing the time when my next post will be an obituary for the fixed income market.

Comments

[swygert@law...:]

John, in all due respect, your comment on writing an obituary for the fixed income market is the kind that spreads unwarranted fear through the markets. You, of course, are not alone -- virtually all analysts and financial commentators are making similar remarks and offering dire opinions regarding the future right now. In 1932, rumors also spread among the populace, but at a much slower pace - still there followed the massive run on the banks. In 2008, dire opinions and rumors spread in hours if not minutes over the internet and MSNBC, CNBC, etc., Alpha, WSJ, etc., and. I believe, is a mjaor cause of countless invesotrs - sophisticated as well as novices -- in making totally irrational choices. Now, you may just be reporting the irrationality that is taking place, but then to extrapolate that bonds are facing a tfinancial armageddon not only overstates the situation, it contributes to further deterioration of the markets. Having said that, I never miss your articles and have learned much from them.

2008 Oct 02 01:01 PM

[swygert@law...:]

In my above comment, I felt so strongly about what I wanted to say I never checked the spelling. Sorry. Kind'a like investors wanting to sell all their bonds and fogetting to check reality.

2008 Oct 02 01:04 PM

[whidbey:]

Good post. The trends noted have implications far beyond bond prices, it means that AmEx may find it can not service existing obligations, not to mention, take on new ones. This same story is rattling the hell out of all commercial paper markets, bonds, and CDS. We have the makings of a collapse that could be far beyond the treasury and fed to manage. My call this AM to Paris was morose since the US markets are telegraphing black signals to EU on all fronts. They are starting to say the "bail-out" while necessary is NOT sufficient. Our office in Moscow is equally alarmed; Russia has little love for the USA, but its love of energy sales is legendary (and necessary) and anything that might slow the sales this winter has their attention. A currency wipe-out would slow energy sales. We should not expect too much if this bill is enacted by the House. I think this is a much longer story than many of us foolishly imagined.

2008 Oct 02 01:39 PM

[Skip Olinger:]

How bad is the securitization market? Amex's fall back liquidity plan is to issue more securitization paper if they get shut out of the unsecured long term debt market.

I also assume they are having trouble issuing commercial paper. What is the effect of that.

2008 Oct 03 09:18 AM

[Sheffeld:]

What I see is the result of companies that value thier assets as they see fit, not as the market does. That attitude and the legislation passed reinforces my point. John's scenario for AmEx would have only proved disastrous if the secured basis for thier financial instruments was not accurate. Tech lenders are not in these straits because they lent based on reasonable asset valuation. If AmEx did the same, then thier bond prices would rebound as the market confirmed the value of the assets backing them. Now over-valuation has been passed into law and paid for by the taxpayer, not by those who refused to abide by the laws governing finance. I would wish all finance professionals good luck on thier ability to assess debt for the next few years, but they'll probably be better of using a psychic.

2008 Oct 03 02:20 PM

[Flubadub:]

I recently bought Amex bonds. Also GE. Thought the price was right. Since I have no intention of selling until maturity should I worry? Listening to doom and gloom commentary leads one to believe that the "sky is falling". There are no low risk places to invest. I should stuff my mattress with dollars. Maybe the best investment is to take a survivalist course and hoard MRE's.

2008 Oct 29 04:00 AM