Monday, June 22, 2009

Loans Versus Bonds Relative Value: Week of June 18

The toxic grabfest is ending. This is best seen by the inversion in the secured/unsecured classes. While the loan universe moved 9 bps tighter over last week, the slow HY bus is still trying to load up on those Neiman Marcus bonds, hoping to see this piece of paper get taken out at par. Here's a hint - it won't.

Also, something really odd is going on with Sealy where loans ripped over 500 bps wider, while bonds were unchanged. This is either i) a bad data point, ii) an indication that the credit market has totally lost it, or iii) Pershing Square V was a fund fully invested in Sealy Loans, collected 2/20 for investing all client's capital in hte mattress-maker's loans, blew up, had a $1 billion BWIC, and annihilated the loan trading levels. While iii would be fun, our money is on the first two.

To visualize the phenomenal run up in credit over the past 3 months, the charts below should demonstrate just how foolish some credit portfolio managers have become.

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