Tuesday, January 20, 2009

Not All AA Bonds are the Same

According to Moody's, Aa Bond:

Obligations rated Aa are judged to be of high quality and are subject to very low credit risk, but "their susceptibility to long-term risks appears somewhat greater".
In other words, while they are not bullet-proof like Aaa's, they should have a minor chance of default. Given the current market condition, it is not surprising that financial and insurance company bonds have sold off more than other AA corporates, but it is pretty wild by how much.

The reason? Ignoring the thought that financial bonds have a higher likelihood of default (I can see both sides of this... on their own yes they do, but government assistance will greatly help), it has become painfully clear that the recovery value of these financial bonds given default is slim (Lehman junior debt is trading at close to nil, while CDS on the senior debt paid out less than 10 cents to the dollar).