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The Simple Reason Why Everyone Wants New Corporate Bonds – Bloomberg

Bloomberg article

Citigroup credit strategist Jason Shoup estimates that investors can add 20 basis points of alpha, as measured by annual excess returns, to their portfolios just by purchasing new-issue bonds. In a world of low and even negative interest rates, that is a not insignificant opportunity and it’s one that investors have been eager to take advantage of in recent years.

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Comments
  • Sundown
    SundownMay 29, 2015"When reading this article, there is nothing here that is enlightening to a professional who has spend time around the corporate bond syndicate desks on Wall Street. The new issue process is one that is analogous to that of horse trading at a state fair. Desk managers converse with each other across firms as to how a deal should be allocated, salespeople and their colleagues "barter" to get the best allocations to their favorite clients (in rank order) and investment m…"
  • Merlin
    MerlinMay 28, 2015"I don't know what percentage of corporate bond AUM are held by the top 10 asset managers so a 45% allocation of the Verizon deal to them (in the related/referenced article) may be in line or not. What I think we can all agree on is that different buy side accounts get treated differently by different 'underwriters' (can you call them that any more?) for a variety of reasons allowing for quid pro quo's and other sorts of game playing. What is clear is that small instit…"
  • SliderMay 28, 2015"If this is true--if, that is, asset managers commonly and profitably game the BIG index construction practice--then what good does it do them? Won't substantially all of them outperform by whatever the gaming premium is, and then settle out into various performance quintiles, just as they would without the gaming? And wouldn't their investors realize that the alpha is chimerical? This may play some role in corporate bond issuance, as the author suggests, but to mentio…"
  • Wolfman
    WolfmanMay 28, 2015"I hope Tracy Alloway is reading these newsletters because I really want to help her. Let's break this down simply. It seems as though her point is that the Corporate Bond market is controlled by the underwriters who pay back big buy side firms with the initial offering of the bonds. This results in a 20 basis point built-in profit since the bonds are then sold at an initial premium in the secondary market. I've always thought that you didn't make or lost money unless…"

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4 Comments on "The Simple Reason Why Everyone Wants New Corporate Bonds – Bloomberg"

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Wolfman
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I hope Tracy Alloway is reading these newsletters because I really want to help her. Let’s break this down simply. It seems as though her point is that the Corporate Bond market is controlled by the underwriters who pay back big buy side firms with the initial offering of the bonds. This results in a 20 basis point built-in profit since the bonds are then sold at an initial premium in the secondary market. I’ve always thought that you didn’t make or lost money unless you actually sold what you owned. That’s right, I’m a little investor and not a… Read more »
Slider
Guest

If this is true–if, that is, asset managers commonly and profitably game the BIG index construction practice–then what good does it do them? Won’t substantially all of them outperform by whatever the gaming premium is, and then settle out into various performance quintiles, just as they would without the gaming? And wouldn’t their investors realize that the alpha is chimerical? This may play some role in corporate bond issuance, as the author suggests, but to mention this factor in the same breath as ZIRP is a stretch.

Merlin
Guest
I don’t know what percentage of corporate bond AUM are held by the top 10 asset managers so a 45% allocation of the Verizon deal to them (in the related/referenced article) may be in line or not. What I think we can all agree on is that different buy side accounts get treated differently by different ‘underwriters’ (can you call them that any more?) for a variety of reasons allowing for quid pro quo’s and other sorts of game playing. What is clear is that small institutional investors are hurt although retail investors invested through mutual funds probably are beneficiaries… Read more »
Sundown
Guest
When reading this article, there is nothing here that is enlightening to a professional who has spend time around the corporate bond syndicate desks on Wall Street. The new issue process is one that is analogous to that of horse trading at a state fair. Desk managers converse with each other across firms as to how a deal should be allocated, salespeople and their colleagues “barter” to get the best allocations to their favorite clients (in rank order) and investment managers are always asking if they received more bonds than their rival fund’s did. This wouldn’t be the case if… Read more »
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