I’m looking at the RV Methodloliges for Global Credit Bond PM end of chapter problems.
(q15, p90) investor trying to swap out BBB rated paper for newly issued “flood of” A rated paper. the solution says spreads will widen and create buying opportunities (cheap RV)
(q25, p93) investor is worried new supply of issues are about to be rolled ou in the primary market. here the solution says spreads will tighten,
so what is it? do spreads widen or tighten for new issues?
I don´t have the books at hand, but I recall that a high amount of new issues means a good environment for bonds, hence the spreads should tighten then!
This is a good question. I have not done this chapter yet but yes new bond issuance (I think because new issuance is a result of increased demand - increased demand improves liquidity, prices go up, yields go down, so spreads will tighten here for that issuance (somewhat counter intuitive - but thinking in terms of demand (basically offsetting supply) helps). For the swap, I think that the new issuance of A rated creates increased demand, so prices go up, yields down, now, relative to BBB, since people are now flocking to A rated, the price (and demand) of BBB is going down, so yields going up on that, so the relative spread between the two is widening. Hope this males sense
@kschloss, how’d you assume new A rated increases demand more than supply? (For price to rocket up).
The spread tightening from new supply is definitely counterintuitive but it’s explained in the Curri under cyclical changes as new corporate supply indicating validation and attraction to tighten spread due to increased demand. But here when they switch out BBB with As, I don’t understand why spread widens. Is it because the switch won’t increase demand in the mkt (compared to overall mkt supply increase)?