Two portfolio managers are pointing to the shifting base of corporate bond investors, as well as the ancient Street practice of "pumping up the book" during deal pricing, to explain the recent ballooning spreads on new corporate issues.
Of late, "AOL [Time Warner] and General Electric are the poster children for pricing tight and performing like poop," says Mitch Stapley, portfolio manager at Fifth/Third Investment Advisors in Grand Rapids, Mich. GE's 5.375% notes of '05 (Aaa/AAA) priced at 80 basis points over Treasuries, but widened 12 basis points in less than two weeks. The bonds had narrowed back to a bid of 76 basis points over the curve last Thursday, however. AOL's 6.875% notes of '12 (Baa1/BBB+) priced at 168 basis points over Treasuries and were bid 102 basis points wider last Thursday.
Christopher Mahoney, portfolio manager at J. & W. Seligman, argues that portfolio managers are practically forced to put in a bid for far more bonds than they want in order to get the desired amount. To be fair, he acknowledges this is nothing new. This allows capital markets desks to drive up the price talk on a deal to artificially high levels.
Fifth Third's Stapley agrees that it has become increasingly common for capital markets desks to "pump their books." However, he is more inclined to blame overall market volatility for the recent poor spread performance of new issues, along with a different type of investor. "You've got so many hedge funds in the market now. The hot money is in and out like that. It's less of your insurance companies buying 30-year Ford paper and putting it away."