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Bond Outlook March 11th

Bond markets, both primary and secondary, are taking a further step towards fulfilling role of credit suppliers as banks abdicate this task. The “L-bend” should be in autumn, then stagnation.

Bond Outlook [by bridport & cie, March 11th 2009]

We recently alluded to the bond market fulfilling the needs of major corporations as banks have abdicated their responsibility as basic lenders (e.g. via commercial paper). We have also remarked how easy it has been for corporations in non-discretionary consumer goods to place new issues. Initially this phenomenon weighed heavily on the secondary bond market, but, as of this month, the latter has returned to normal (so long as we are talking about high-quality corporates), and we believe it now offers opportunities for investors. Part of “normality” is for the secondary market to correct mispricing in the primary market.

A further development in corporate bond markets is now taking place. Because of over-subscription, many would-be purchasers, opportunistically, are putting in bids for more than they really need, thus exaggerating the over-subscription, and pushing bond prices above par, only to see them fall below par as these same “investors” sell their bonds. To counter what is perceived as an unhealthy trend, issuers are promising to issue whatever amount the subscribers seek. This should greatly reduce such “stagging” strategy and therefore oversubscription, but it also implies that the corporations taking this approach are prepared to raise significantly more cash than they really need.

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