Loans Versus Bonds Relative Value: Week of August 6

Tyler Durden's picture

It's official: irrational exuberance in the secondary market is back. Indicative loans are now at just over 400 bps while bonds are less than double that at 761 bps. Of course, everyone at this point has forgotten the expectation of 20% defaults in HY names by the end of 2009. All shall be well in 5x+ leveraged consumer names wich make mattresses. Not sure if the Sealy loans trading 450 bps outside of bonds is real or not, but who really cares: the bond squeeze could easily push it so tight you would have to pay the company to hold their CCC-rated toxic paper.

Next week: look for loans to trade as wide as US CDS, with bonds squeezed to nano bps over zero.

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Anonymous's picture

The very volatile 30-year bond is giving our model fits, having crossed over the signal line five times in the last eight weeks, we have seen the bond move between roughly 4.3% and 4.6% six times in that same span. Bond investors have a lot to worry about, from the declining dollar, to debt issuance (added supply), to rebounding economic pressures, to still higher government spending. Depending upon the day of the week, bonds are either rallying strongly or falling like a stone. Commodity prices have leveled out over the past two months, soothing some of the inflationary fears, however the willingness of Washington to spend (and ours to receive!) is filling the pipeline of bond issuance well above what many believe the markets will bear – without significantly raising rates to clear the inventory.

B_Movie's picture

so much for yesterdays trading under last months high, a strong reaction to get back above that montly level.

what a powerful daily bar already painted. good lord,

Anonymous's picture

This is because -- for the average retail baby boomer -- corporate debt is the new equity, equity the new option, and option the new, retail accessible, "equity default swap".

It's a perfectly logical progression actually as boomers become more risk adverse while they traverse into their retirement years. And it is no wonder why the government feels relatively comfortable floating so much debt -- there is going to voracious demand for it down the line.

Anonymous's picture


dnarby's picture

OK, you painted an eloquent picture, if you would, please put it in a frame.  Why is there going to be voracious demand for debt down the line?

Anonymous's picture

+1 for the idea of Sealy and Certa being the next GS and MS.

Gilgamesh's picture

Select Comfort is the next BoA?