Introducing The Corporate Bond Investor

by: Donald van Deventer

Summary

Kamakura Corporation has launched a new service on Seeking Alpha that brings traded bond prices and state-of-the-art default probabilities to all investors, large and small.

The service ranks all heavily-traded issues weekly by "best value," defined as the ratio of credit spread to matched maturity default probabilities.

The default probabilities used are the state-of-the-art KRIS version 6.0 default probabilities built on 2.2 million observations and more than 2,700 defaults from 1990 to 2014.

It's a great pleasure to announce a new premium service from Kamakura Corporation on seekingalpha.com, The Corporate Bond Investor. This new service is an important step forward in Kamakura's efforts to bring bond market transparency and state-of-the-art financial and risk analysis to all investors, from retail investors to the largest and most sophisticated investors in the world.

Fixed income investors have learned the hard way that reliance on legacy ratings can be a negative alpha investment strategy. In fact, Prof. Jens Hilscher, senior research fellow at Kamakura Corporation and professor at Brandeis, and Prof. Mungo Wilson of Oxford University have shown that modern statistical methods like those used for The Corporate Bond Investor are much more accurate than legacy ratings. Corporate default probabilities, which are at the heart of The Corporate Bond Investor, are very important for another reason. Prof. Hilscher, writing with Prof. John Campbell of Harvard University and Dr. Jan Szilagyi of Fortress Investment Group, showed that high default risk common stocks underperform low default risk common stocks in the Journal of Finance in 2008 and in the Journal of Investment Management in 2011.

Each week, members of The Corporate Bond Investor receive a listing of the most attractive corporate bond investments among heavily-traded, fixed-rate, non-call, senior debt issues for three maturity ranges: 1 year or longer, 10 years or longer and 20 years or longer. The bond rankings are generated by Kamakura Corporation, one of the world's most respected risk management firms with clients in 45 countries. Companies that have been featured in recent rankings by Kamakura Corporation include Bank of America Corporation (NYSE:BAC), Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Apple Inc. (NASDAQ:AAPL), BP PLC (NYSE:BP), and Exxon Mobil (NYSE:XOM). The bond prices and default probabilities are provided by Kamakura Risk Information Services. The Corporate Bond Investor features the newest version of the Kamakura Risk Information Services default probabilities. The new version, version 6.0, will not be released for general use until late-June 2015, but the version 6.0 default probabilities will be available on The Corporate Bond Investor starting on May 1. The bond prices used are for bond issues recorded by FINRA's TRACE system with at least $5 million in daily trading volume.

Here's what subscribers receive:

  1. Weekly updates on credit spreads and default probabilities for heavily-traded U.S. corporate bonds
  2. The ratio of credit spreads to default probabilities is used to rank "best value" bonds
  3. All heavily-traded, senior, non-call, fixed-rate debt, excluding bonds with survivor options, are included
  4. KRIS default probabilities are used world-wide by central banks, banks, investment managers and insurance firms
  5. Bond prices used are traded prices in the U.S. corporate bond market via TRACE
  6. Credit spreads used are carefully interpolated from matched maturity Treasury yields
  7. Methodology is supervised by Prof. Robert A. Jarrow and Dr. Donald R. van Deventer

I'm very grateful that the readers of seekingalpha.com have ranked me the number 1 fixed income analyst beginning in January 2014. The encouragement and suggestions that we've gotten from the 4 million subscribers on Seeking Alpha are what has made it possible to bring The Corporate Bond Investor to fruition.

Here's some information to get you started:

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More Background on The Corporate Bond Investor

The criterion used for ranking the "best value" trades is the ratio of matched maturity credit spread to matched maturity default probability. The Kamakura Corporation default probabilities used for The Corporate Bond Investor are also used by a wide array of central banks, commercial banks, insurance firms, and investment management firms around the world. The calculations are supervised by Kamakura's founder, chairman and chief executive officer Dr. Donald R. van Deventer and Kamakura's Managing Director for Research Prof. Robert A. Jarrow.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.