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"Intoxicated Investors" Slammed Corporate Bonds

A key culprit behind the precipitous price declines in credit markets during the financial crisis: mutual funds with short investing horizons.

Vincent Ryan, CFO.com | US
July 21, 2010

Welcome to the real world on corporate bonds

Welcome to the real world on corporate bonds. Yes, there are yield hogs in the market, and they tend to own illiquid CDO paper, and relatively risky but liquid corporates as well. If they face redemptions, what will they sell? The corporates of course. That exacerbates the upside move in the yields of risky corporates, but what should you expect? Birds of a feather flock together, and in any sharp move, it is the balance sheets of the owners that dictate the sales, not the credit quality only. But if you are a clever CFO, why worry? You planned your need for liquidity over the life of the bonds that you issued, and should not care about the market price of the bonds, that is, unless you would like to buy them in at a discount. Markets are perverse. Get used to it. Use them to your advantage, but don't complain about them after the fact. David Merkel Aleph Investments

Posted by David Merkel | July 22, 2010 02:51 am

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