0

I looked at the past yields of Sears Holdings (before chapter 11) and the Yield to Maturity (YTM) were all as I would expect. I look at current yields of JCP and they are pretty much as one would expect. The further out the maturity date, the higher the yield. Why are the bonds from FTR almost completely inverted? Is there something obvious that I'm missing or is it just a supply and demand issue (for example, someone dumped a lot of bonds on the market)?

Here's a couple CUISP's:

35906AAH1 - 2020/04/15 - 104%

35906AAT5 - 2020/09/15 - 79%

35906AAM0 - 2023/01/15 - 32%

Thanks.

  • 3
    By posting, aren't you soliciting advice? – Bob Baerker Aug 26 at 20:05
  • "Is there something obvious that I'm missing" - yeah, RIGHT NOW we have inversed yields thanks to the US government. – TomTom Aug 26 at 20:40
  • Not sure if this is a duplicate, but definitely related money.stackexchange.com/questions/112587/… – Vality Aug 26 at 22:23
  • @TomTom The govt yield curve isn't that inverted. – D Stanley Aug 26 at 22:25
  • Where are your yields coming from? Could the prices be stale? – D Stanley Aug 26 at 22:25
1

Those astronomical (for bonds) yields indicate very high risk of default, so the shape of the yield curve is (to me) not as interesting as what the prices (not yields) indicate about bankruptcy. Looking at the prices (64% for the front bond, 50% for the longer ones), investors seem to think they're going to get only 50-60% of the principal bank in the next year, and don't expect that recovery to get better or worse over the next few years (the prices are about the same regardless of the tenor).

In this case, the "inverted" yield curve is really more of a mathematical artifact of the prices that take an irrelevant maturity date into consideration. In other words, whatever tenor bond you buy, the expectation is to get back 50-60% of the principal in 6-12 months, so the maturity doesn't matter.

0

The most likely reason for bonds to invert in this way is that he bond rate is predicted to drop a lot, If investors expect that in future the bond rate will drop greatly they may be willing to compromise returns for a long term guaranteed rate.

My answer to this question may be helpful for more details, albeit not specifically about this company: Locking in rates during yield curve inversion

  • 1
    I don't see how that applies to a corporate high yield junk bond, which is supposedly not correlated with interest rates. The only way the rate would change is if they are renegotiated. Unless the company files for chapter 11, they have to pay back the original bonds first, then reissue new ones at a lower rate. The only thing I can think of is capital gains tax considerations. – user170226 Aug 27 at 1:54
  • @user170226 Even with junk bonds, you have to compete with what the company could otherwise get from a bank loan or other investment options. Its likely the rates would be high for a company with poor credit ratings but they can still get them. Additionally even for junk bonds, long term bonds are more sensitive to interest rates than short term ones investopedia.com/ask/answers/05/ltbondrisk.asp – Vality Aug 27 at 2:27

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.