Short-term Corporate Bond has Higher Yield than Long-term. Why is This?

Question

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.

Answer 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.

Answer 2

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