Where the Credit Freeze Has Thawed

Amid the new "Ice Age" in credit markets, some bond market pros are still finding attractive opportunities. Here's what they're buying

by David Bogoslaw

One market pro was buying Anheuser Busch bonds in the midst of the freeze-up gripping credit markets in October Getty Images

The global half-percent interest rate cut coordinated by central banks from the U.S. to China on Oct. 8 sparked yet another glimmer of hope for a thaw in the frozen credit markets, but the unprecedented action also underlined just how grave—and widespread—the financial crisis has become.

The coordinated rate cut came one day after the Fed said it was creating a special funding facility to buy three-month unsecured and asset-backed commercial paper directly from eligible issuers—an attempt to relieve some of the strain in recent weeks caused by a pullback by money-market mutual funds and other cash-strapped investors. That move encouraged some fixed-income fund managers but made others, such as Bill Larkin of Cabot Money Management in Salem, Mass., more nervous. Commercial paper leverages the hard assets of more creditworthy companies, and if those companies are having trouble getting short-term loans, the implications for higher-risk companies are even worse, says Larkin.

Some investment strategists believe the global rate cut and other groundbreaking moves by the Fed designed to jump-start liquidity will eventually cause loans to start circulating through the system again. In the near term, however, the unwinding of debt positions will continue "until there's some equilibrium reached between the supply of risk and the demand for risk," which could last for another couple of weeks, Manny Labrinos, credit portfolio manager at Nuveen Asset Management in Chicago, wrote in an e-mail message.

Not Everyone is Hurt

From the news headlines, anyone would think that the credit freeze has incapacitated all publicly traded companies equally, leaving all of them stranded without access to the capital markets. But that's not the case.

Despite the relative absence of liquidity, some bond investors still have some appetite for individual corporate bonds, if the price is right, says Labrinos at Nuveen. "I have to be concerned that a month from now if I decide to sell my bonds, will Wall Street be there to provide a bid for me?" he says. "I'm going to request a premium for any [individual] cash bond right now, because I have to take into account that I may be stuck with it for a while."

There's no price at which James King, president and chief investment officer of National Penn Investors Trust in Reading, Pa., is willing to buy corporate debt right now given the dearth of buyers in the market. "Until that frees up, I'm on the sidelines with the existing [bonds] I had," he says.

Decrease in Bond Deals

The number of corporate bond deals done in the first nine months of this year has dropped dramatically from last year. For investment-grade companies, there were 834 bond offerings for a combined value of $551 billion through Sept. 30, compared with 1,782 deals for a total value of $752 billion for the same period in 2007, according to Diane Vazza, managing director of global fixed-income research at Standard & Poor's.

For speculative-grade companies, the decline was even sharper— 101 deals had come to market for a combined value of $37 billion, vs. 246 deals for a total value of $107 billion in 2007, says Vazza.

The lack of liquidity is reflected in credit spreads, the differential between the yields on corporate bonds and those of comparable maturity risk-free Treasury bonds. Spreads had been widening since the summer of 2007 but have reset at five-year highs 12 times since mid-September, around the time the U.S. Treasury announced its $700 billion financial rescue package, says Vazza.