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Bond Outlook May 20 2009

Fixed-income investors appear to have lost their powers of discrimination as to what is a good versus a bad corporate bond, and lead managers are certainly taking advantage of that!

Bond Outlook [by bridport & cie, May 20th 2009]

“A new issue in EUR? Buy it, please.”

“Perhaps you would like to discuss maturity, sector, price and yield terms?”.

“No, just buy it!”

Whilst imaginary, this conversation between a fixed-income investor and his bond broker reflects a growing reality in the market for new-issues in corporate bonds in EUR. Such conversations are rare in our firm, as we continue to warn our clients and readers of this Weekly that whilst corporate bonds can be a good investment, it is essential to ensure that the issuers are solid, their activities relate to the provision of consumer staples, and that the maturity of the issue is towards the shorter end of the curve (no more than 5 years and preferably 3 to 4 years).

The degree to which spreads tighten once new issues reach secondary trading implies numerous cases of mispricing at the expense of issuers (and correspondingly to the advantage of lead managers). The phenomenon is found regularly for EUR, but less so for USD, and we must let our readers draw their own conclusions from that.

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