bond questions

How about posts about bonds? I mean we are here because we understand statistics, utility functions and the like --- right?


Maybe we have to much gamble in us - or to little $ to really pay attention to bonds.


For example - some may argue that the econom comeback is priced into stock right now. What about thoughts on high yield bonds?


Amazon.com has some bonds yielding over 15%. Thats right - if Amazon is here in 5 years and is not b/k then you make that yield (well almost...).


Just streaming my thoughts here

J$

Personally I would rather take a shot in Vegas

but best of luck.

I don't know if Amazon will make their coupon five years out.


But I'm thinking I could write stock puts, and get a correlated payout.


I'm thinking there might be some other junk out there that would add a more of a new dimension to my stock portfolio.


And, I'm thinking that, rather than this correlation being priced in to the relative debt yields, the opposite might be true.


eLROY

I think credit is a good play right now, especially if you believe the recovery story. And both the equity markets and bond markets seem to be pricing this in... bonds got killed last week on the back of stronger data and revised Greenspan. However, corporates spreads have actually widened, largely due to the whole Enron affair and offer good risk/return.


I don't know about high-yield, as that tends to be name specific but the investment grade area looks quite good to me for playing the spread.


Of course, the problem for most retail investors is that liquidity in corporates is poor and buying spread is difficult.

High yield spreads tend to be correlated with equities making it possible to do some relative value trades. This is one area that i think will grow among hedge funds and other fixed income players. With the models like KMV, which is essentially an option model of bonds and equities, gaining in popularity(since they have outperformed S&P and Moody's), trading corporates versus stocks will be come a more common trade.


Currently, there is still poor liquidity in corporates and the credit derivatives sector is still in its infancy but there is a tremendous push for more credit related products and should result in a much more efficient market going forward.

It would seem to me that, if they had assets which could be liquidated in a fire sale, they could borrow subordinted debt against those assets to buy their unserviceable debt in the open market.


Meaning, suppose Company X has $100 worth of assets. At the moment an imminent banruptcy becomes 99.99% certain, their outstanding debt should be trading at $99, and their preferred stock near zero. Can't they then borrow $100 to buy up all their own obligations?


Or do the bonds never drop to $100 so long as there are ongoing operations? Still, it seems you could always refinance and keep going, and never miss a coupon. What am I missing?


Why do people miss coupons in the real world?


eLROY

In Feb - credit spreads widened a lot. So far this month some have come back. (Here I mean investmetn grade streads)


High Yield has about a .5 correlation with equity.


In any case, to your question elroy, companies go B/K because they cant service their debt. They can't refi because the underlying assets are not worth anything - or - are not throwing off enough cash.


Also it is not clear that KMV (which is now owned by S&P) has outperformed the rating agencies - how do you judge the performance of the rating agencies in the first place?

It would make sense if the creditors become the controllers.


Meaning, the most optimistic people end up holding all the debt, and they would prefer to reorganize, and install new management - rather than a new set of creditors refinancing the existing management.


So people buy the defaulting debt for the purpose of forcing a reorganization and installing new management of the assets.


Whereas the presumption is the assets will keep declining if the existing structure is refinanced.


It's a virtual liquidation, with the creation of a new set of shareholders in the form of whoever is willing to pay the most for the existing debt. There is no need to create new debt in another set of hands.


More or less...


eLROY