Loans Versus Bonds Relative Value: Week of August 13

by: Tyler Durden

When last week we said "look for loans to trade as wide as US CDS, with bonds squeezed to nano bps over zero" we thought we were kidding. We were wrong. Last week the across the board tightening continued, with the loan universe positioned exactly at 400 bps, an 11 bps tightening from the prior week, while bond tightened by 28bps to 733 bps. Yet while there were the rubber band movements tighter across several high beta bond names such as Select Medical and Aeroflex which screamed much tighter and took the index in, for the first time a more substantial widening was also noticed, that of FDC bonds, going wider by 150bps.

As always, look for the credit market to lead the overall market direction (presumably from being at least slightly more rational than equities historically). Furthermore, this universe may not be indicative of trends elsewhere in credit, where HY12 has been leaking wider over the past 2 weeks.

The bottom line is that 400 bps leaves very little upside for interest to the upside for the secured space, and the same can be said for HY bonds at 733 bps. However timing the inflection at this point has become a foolish game with the entire market trading as one asset class.

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