Saturday, September 29, 2007

An Insane Bid For BBB Rated Bonds

I am attempting to reconcile a two things. The first is Foreign sales drop for U.S. bonds, notes.
Foreign investors bought a net of $19.2 billion in long-term U.S. securities in July, the lowest amount in seven months, the Treasury Department said Tuesday, suggesting that the credit crisis is denting demand for U.S. assets.

Demand for long-maturity securities such as bonds, notes and equities hit its lowest level since December and fell sharply from the downwardly revised $97.3-billion net inflow reported in June.

"The real culprit here is the credit crunch, which has caused a drastic slide in purchases of corporate and agency bonds, and I think it's only a taste of what's to come because the real problems didn't hit until August," said David Powell, senior currency strategist at IDEAglobal in New York.

Official foreign investors grew particularly wary of U.S. corporate bonds in July, with their net purchases falling to the lowest level since December 1995.
The second comes from Professor Bennet Sedacca on Minyanville who wrote a four part series on Friday called You have to be kidding me! Following is part 4.
You have to be kidding me! Part 4

So you think the debt "crisis" everyone is talking about has resolved the issue of mis-pricing of risk? Think again. Below is a real-life real-time situation that happened this week.

I had $120,000,000 to spend on 2.5 year duration GNMA, FNMA, FHLMC pools and CMOS (collateralized mortgage obligations). The securities I bought were rock solid in terms of structure and have virtually no way to extend beyond three years even if prepayment speeds go to zero. My yield? 5.12% for the whole portfolio.

Now, what do you think BBB rated two and three-year industrials trade for, according to Bloomberg? 4.99% and 5.25%, which averages to...? Yep, you guessed it. 5.12%.

So, I can either buy BBB corporates or US agencies at the same level. Granted, it is not the managers buying these bonds that are making the mistake. Institutions hire them, along with individuals, to buy BBB industrials. There is still too much money chasing these. I tell you, if you would have told me this was possible, I swear, I wouldn't believe it. But see this Bloomberg screen if you don't believe me.

I mean, for real, you have to be kidding me..!
Here is the chart Bennet posted.
(click on chart for a sharper image)

BBB Par Coupon Yield Curve



One possible answer to this apparent anomaly is the above chart is showing what happened last week while the first article pertains to what happened during the July/August credit crunch. But whatever the reason, or whoever is doing the bidding, as long as there is an insane bid for corporate bonds one step above Junk, the stock market is unlikely to crack.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

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