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Capital Markets

Investment-grade bonds: Step back in time

The collapse of structured finance issuance has significant implications for the financing of assets such as mortgage loans but has also dramatically changed the nature of the traditional investment-grade bond business in America. Alex Chambers reports.

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REMEMBER THE DAYS when issuance from US agencies was booming and their calendars dominated the primary markets? The excitement created by a brand name corporate announcing plans for a benchmark issue? Well those days are back – for now at least. Easily understood, corporate credit is now the order of the day, an understandable outcome of so many investors having had their fingers badly burnt on US sub-prime asset-backed securitizations and mezzanine tranches of sub-prime ABS CDOs.

So there is something of a backlash against some of the trends of recent years when nearly all the banks went looking for fixed-income alchemy, seduced by highly quantitative techniques and the associated high fees. As the market’s recent woes show, many structured transactions are so complicated that even the brightest people struggle to understand them. And that is a problem for efficient functioning markets, where transparency is everything. Participants are asking how is it possible to price accurately a security that is based on thousands of non-trading components.

Jim Probert, global head of investment-grade debt syndicate at Bank of America, admits that compared with some parts of the finance world investment-grade bonds might not appear to be very sexy but as he says: "This year we will price possibly $1 trillion of high-grade bonds in the US.

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