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The Worst Bond Market In 22 Years? at Trader’s Narrative

The Worst Bond Market In 22 Years?

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On Friday’s 1pm conference all, Bear Stearns (BSC) CFO, Sam Molinaro, said:

These times are pretty significant in the fixed income market. It’s as been as bad as I’ve seen it in 22 years. The fixed income market environment we’ve seen in the last eight weeks has been pretty extreme. So, yes, we would make that comparison to market events [late-90s debt crisis].

Although he meant the call to be reassuring to Bear Stearns investors and to the market in general, his comments pulled the plug on an already weak market and we plunged to close below the “line in the sand” 1460 on the S&P 500.

Worst in 22 Years?
While reading the most recent Economist over the weekend, I caught an article about this whole sub-prime mess and Bear Stearn’s involvement. Sure, there are some stresses and quiet a bit of panic, fear and loathing. But worst in 22 years? According to the graph included in the article (from Bear Stearns no less), it is dubious that we are seeing “the worst bond market in 22 years”.

The chart showed the spread between the Bear Stearns high yield bond index and treasuries. I wish I could show it to you but since the scanner is on the fritz, I’ll have to describe it. Keep in mind that the chart is small and the line thick, so all numbers I mention are eye-balled approximations.

According to the chart, there were these significant spikes in the high yield - treasury spread:

    1991 -> 900
    1998 -> 700
    2000-2002 -> 1000-1200
    right now -> 450
    recent low ->300

The period between 2000 and 2002 showed several spikes within the 1000-1200 range. Since then, the spread narrowed and reached a recent low of 300ish. Now it has increased to 450ish. So, atleast according to this measure, we are just heading back into more reasonable territory, from a long term perspective.

And today, we learn that a scapegoat has been named: Warren J. Spector, co-president of Bear Stearns (BSC) or should I say, ex-co-president.

Now, all eyes are on Tuesday’s Fed meeting and their statement. I don’t think anyone is seriously expecting a rate cut tomorrow but the likelihood of one sometime between now and the new year just got a shot in the arm.

Finally, it looks like the worst may be over in the financial sector as almost all individual securities there are jumping 2-3% or more. We’re still not out of the woods yet but there is no question that this has been one of the deepest oversold conditions in this sector in a long, long time.

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3 Responses to “The Worst Bond Market In 22 Years?”  

  1. 1 Johan

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    I don’t see myself as an expert, but I think it is odd that people measure the spread in point value. It should be measured in relative value. Or more accurate the relative value of the REAL rate spread.

    I think it’s quite a bit a difference to compare 3% rates to 4% rates versus 13% rates to 14% rates. But they both have the same spread.

    But as I wrote, you have to remove the inflation from those values first, and then make a RELATIVE comparison.

    My 5 cents…

  2. 2 Babak

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    Johan, that’s a brilliant observation. Unless the data is normalized like that, we end up comparing apples to oranges.

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