Heh, ISM/OSM again

[cute fuzzy bunny]

Because they're supposed to be a safe haven...

 

[FinanceDude]

Why does losing 5% on bond issue upset me so much more than a 5% move on a stock?

Because they're not supposed to, unless you own some fine GM or FORD bonds...........

 

[FIRE'd@51]

The other thing to consider is that the real rate of interest has increased 25-30 basis points over the past month (take a look at TIPS rates on Bloomberg). The duration of ISM/OSM with respect to real rates is about 10. So at least half the price decrease over the past month could be explained by a rise in real rates. Note that TIPS prices have declined a couple of percent over the past month as well.

 

[brewer12345]

Spread over comparable TIPS is about 210 BP, so the spread has widened out somewhat to reflect the increased credit risk. I actually was somewhat surprosed that S&P did not whack the ratings more than a couple notches, and I would expect more cuts once the deal goes through. But it will be no shock to the market, given that everyone is now expecting the deal to happen with an attendant degradation of credit quality.

As a point of interest, this deal was such a shock that it has changed the bonds that financials issue. Countrywide just did a 5 year bond deal that included a "poison put": this allows the bondholder the option of forcing the issuer to buy back the bonds at 101% of par if the issuer is acquired. This is pretty much unheard of for high grade debt issued by a financial.

 

[FIRE'd@51]

For anyone who's still left with these puppies, a nice spread has opened up between ISM and OSM. I had 50% in each bond. Today, I swapped all of my ISM for OSM taking out 0.52 per share. OSM currently has a YTM of about 40 basis points more than ISM at this spread.

 

[cute fuzzy bunny]

Yeah and ISM had a nice little pop today for anyone else who didnt bail out but wants to.

 

[haha]

As a point of interest, this deal was such a shock that it has changed the bonds that financials issue. Countrywide just did a 5 year bond deal that included a "poison put": this allows the bondholder the option of forcing the issuer to buy back the bonds at 101% of par if the issuer is acquired. This is pretty much unheard of for high grade debt issued by a financial.

Very good provision. Fool me once...

Ha

 

[soupcxan]

JSM has been beaten down to 20 which puts it at a 7.5% yield given the coupon...granted there has been some progress in moving the buyout forward but they really seem to be pricing this stuff as junk...and I really can't imagine it's risk profile is that junky. Any opportunity here?

Plus I imagine you'd get the accretion back to par of $25 (although not until 2043).