Monday, February 15, 2010

The Value of Corporate Bonds

WSJ (hat tip Abnormal Returns) details:

Since peaking in mid-January, corporate-bond prices have had their biggest decline since a breakneck rally that began last March. That climb had made it cheaper for companies to finance operations, greasing the skids of the economy.

This past week, though, the cost of protecting against corporate defaults rose to the highest level in three months. Returns on high-yield debt turned negative for the year. And companies, after raising record amounts of new debt earlier this year, abruptly trimmed the amount of new debt they brought to market. Some were forced to cancel sales.

Even after the market's recent declines, many analysts aren't expecting much, if any, of a rebound.

"The move from here gets a lot tougher," said Morgan Stanley credit strategist Rizwan Hussain. "We are now basically back to what looks like a typical credit recovery."


While not exactly a sell-off, after the one direction bet we've seen with corporate bonds over the last 12 months ( that has narrowed the spread on the broader corporate bond benchmark from 600+ bps to less than 200 bps), the value of corporate bonds becomes as dependent on expectations of interest rates as on future spread compression.

Source: Barclays Capital