Loans Versus Bonds Relative Value: Week of October 15

The secured-unsecured convergence has hit a 2009 record, as investors are starting to shun the security of loan positions and continue piling into risky unsecured bonds. The margin between the average loan and bond spread has collapsed to 250 bps from 324 bps in the prior week. While one could make the argument this will hit zero (or go negative), a logical trade continues to be a divergence position long secureds, and short unsecureds. But due to the banana economy nature of our markets, it is likely also the wrong trade. Some rather marked widening was evident in TRW loans and Targa resources, while Baldor, Charter and Laureate loans likely feel due to profit taking. Oddly, the bond universe was universally tighter, to the tune of 20 bps week over week.