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How the Bond Markets React The long reach of the "sheriff of Wall Street" spilled over into the bond markets last week. Or more specifically the corporate offerings of American International Group and Marsh & McLennan.
Marsh & McLennan was informed that it was only "Day One" of the suit recently filed by the attorney general accusing the firm of fraud in its insurance relationship with AIG. That put the bonds for both companies under pressure.
To explain why, it is best to bring some basic knowledge to the discussion. Corporate bonds need to have the risk involved in the debt they are offering to sell clearly stated or at least assumed. This gives the holder of that debt some way to measure the risk involved. The benchmark of that risk is usually the Treasuries (similar length government bonds are compared to similar length corporate offerings to make a good comparison possible). When the safety of that bond comes under question and when the New York Attorney General comes finger pointing, the effects are changes in basis points (the measure in hundredths of percentage points - for instance, a change of 110 basis points is a 1.1% change).
In the case of Marsh & McLennan, bond traders did not like what they perceive as a bottomless pit of possibilities. So the bonds for the company, who uses this money to cover their insurance bets grew to a spread of over 210 basis points. Not only a knee jerk reaction but possibly bound to get worse as well.
AIG was faced with similar problems from the law and it will have an effect on its Triple A credit rating. How much though has yet to be wrestled from the market. But count on the pressure on its debt offerings continuing as well.
Some bond traders will tell you that it is only a specific event involving these two companies. They will also tell you that the state of corporate credit is just fine.
Problem is, it, like so many things on the equity side of the equation, have gotten somewhat expensive. As the ten-year treasury once again closes in on the 4% mark, things may not be what they seem at first glance in the fixed income market. But what they will appear to be is expensive.
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