Comments on: Curves and Corporate Credit http://alephblog.com/2008/10/15/curves-and-corporate-credit/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Fri, 25 May 2012 21:31:47 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: David Merkelhttp://alephblog.com/2008/10/15/curves-and-corporate-credit/comment-page-1/#comment-19459 David Merkel Fri, 17 Oct 2008 06:21:56 +0000 http://alephblog.com/?p=1034#comment-19459 The situation at MS is unclear. It has an inverted spread and yield curves, but the price curve is flattish, from what I can see. The situation at MS is unclear. It has an inverted spread and yield curves, but the price curve is flattish, from what I can see.

]]> By: rowerhttp://alephblog.com/2008/10/15/curves-and-corporate-credit/comment-page-1/#comment-19454 rower Thu, 16 Oct 2008 19:53:06 +0000 http://alephblog.com/?p=1034#comment-19454 Hi David, I am a great fan of your blog. Thanks for the insightful posts. I have a newbie question. You expelained the issue above but i am still having a hard time to understnd. I was looking at Morgan's CDS curve a week ago (before mufg deal) and it was inverted. Why a companies credit curve (CDS) is inverted in a distressed situation? Can you shed some light on this? Thanks very much in advance. rower Hi David,

I am a great fan of your blog. Thanks for the insightful posts.

I have a newbie question. You expelained the issue above but i am still having a hard time to understnd. I was looking at Morgan’s CDS curve a week ago (before mufg deal) and it was inverted. Why a companies credit curve (CDS) is inverted in a distressed situation? Can you shed some light on this? Thanks very much in advance.

rower

]]> By: David Merkelhttp://alephblog.com/2008/10/15/curves-and-corporate-credit/comment-page-1/#comment-19432 David Merkel Wed, 15 Oct 2008 16:05:02 +0000 http://alephblog.com/?p=1034#comment-19432 Dan, perhaps I need to be more precise. Ordinarily dollar price curves don't have any regular shape. A lot depends on the coupons of the bonds... were they issued when Treasuries were high or low? Were they issued during a time of credit stress or ease? But during a time of crisis for the company, they assume a distinct shape, where the short end is anchored slightly below par, and the long end is anchored near the expected recovery value. Those bullish on the name sell the short debt and buy the long debt, because it resembles more of a free option on recovery. In default, all senior unsecured bonds get roughly the same, leaving aside bonds issued at a large discount, but typically, the longer bonds rally the most in a recovery, however unlikely. Dan, perhaps I need to be more precise. Ordinarily dollar price curves don’t have any regular shape. A lot depends on the coupons of the bonds… were they issued when Treasuries were high or low? Were they issued during a time of credit stress or ease?

But during a time of crisis for the company, they assume a distinct shape, where the short end is anchored slightly below par, and the long end is anchored near the expected recovery value. Those bullish on the name sell the short debt and buy the long debt, because it resembles more of a free option on recovery. In default, all senior unsecured bonds get roughly the same, leaving aside bonds issued at a large discount, but typically, the longer bonds rally the most in a recovery, however unlikely.

]]> By: Danhttp://alephblog.com/2008/10/15/curves-and-corporate-credit/comment-page-1/#comment-19431 Dan Wed, 15 Oct 2008 15:52:02 +0000 http://alephblog.com/?p=1034#comment-19431 David, I think something is amiss with your dollar-price inversion observations. Any curve trading at a discount to par will typically see dollar-price inversion due to term structure alone. What would be amazing would be to see a positive price curve; indeed, I would suggest that below par, it's virtually impossible except in very unusual situations. When default is highly likely, I would expect the price curve to be nearly flat, and less inverted than in all other scenarions. David,
I think something is amiss with your dollar-price inversion observations. Any curve trading at a discount to par will typically see dollar-price inversion due to term structure alone. What would be amazing would be to see a positive price curve; indeed, I would suggest that below par, it’s virtually impossible except in very unusual situations. When default is highly likely, I would expect the price curve to be nearly flat, and less inverted than in all other scenarions.

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