3 min readIntroduction In its most basic form, investing is all about understanding and managing risk. For fixed income securities, it’s more about managing credit and interest rate risk. And, understanding credit is of particular importance for corporate cash investors whose primary concerns are principal stability and liquidity, while attractive yield potential is often a secondary concern….
2 min readIn April 2007 increasing losses sustained by bonds with exposure to subprime mortgages became apparent. [See “The Subprime Flu,” April 2007] In the months that followed, this brought on a widespread credit contagion and took many investors by surprise. Among the hardest-hit areas was the short-term credit market that came to a screeching halt in…
2 min readExecutive Summary In the past year or so, LBO minefields started to appear in the “safe and sound” investment-grade credit landscape filled with A and AA-rated names. About 27% of the A-rated corporate index may be buyout targets. The LBO of Sallie Mae brings takeover risk to the “safe haven” financial sector. All of the…
2 min readWhen the obscurely named ABX.HE.BBB-.06-1 crawled from Wall Street trading computers into millions of living rooms through the national media last February, a system meltdown was fast approaching. The ABX isn’t an Internet worm; it is a specimen of “asset-backed credit default swaps,” or a quasi insurance policy on borderline investment-grade bonds repackaged from subprime…
2 min readExecutive Summary The recent SEC investigation into the auction rate securities market found “industry-wide” violations by 15 major brokerage firms of the Securities Act of 1933. We think that the violations uncovered by the SEC lend evidence to the opinion that the auction rate securities (ARS) market did not have the competitive bidding element. We…
2 min readExecutive Summary Since the introduction of the first fund in 1972, institutional money market funds have gained a well deserved position in most corporate cash portfolios, thanks to their safety, constant share price, liquidity, and competitive yield. But money market fund investing is not risk-free. In the last 15 years, at least one institutional fund…
1 min readExecutive Summary ABCP can be a good investment choice in large corporate treasury accounts due to the depth, liquidity, flexibility, and yield potential of the asset class. ABCP gained popularity recently because increased event risk of corporate names resulted in concern about unsecured commercial paper. A potential investor of ABCP should carefully review the strength…
2 min readResearch Highlights The ratio of roughly 3 to 1 single-A vs. double-A issuers suggests a liquid market sector and potential for better risk diversification. One-year default probability but a single-A corporate issuer was 0.02% in the last 10 years. Investing in single-A securities would have increased cumulative credit losses by 0.20% over a five-year span…
3 min readOn the day Merck announced the withdrawal of its arthritis drug Vioxx, its stock price closed down 27% from the previous day. By the time Moody’s downgraded Merck’s debt to Aa2 40 days later, the formerly AAA-rated company had lost 42%, or $58 billion of its equity value. Is it time for investors of short-duration…
2 min readExecutive Summary Empirical data support the view that AAA-rated asset-backed securities provide comparable investment returns while incurring less credit risk and return volatility than AAA-rated corporate securities. The annual return advantage of ABS was 5 basis points (bps) over corporate securities in the last six years. The return pickup shot up to 41 bps annualized…