cheap-bonds-make-for-easy-money

Cheap bonds make for easy money

The price difference between cash bonds and credit default swaps provides a good opportunity for investors with cash to spare.

By Nick Ferguson

December 11, 2008

When markets are put under extreme stress they create all kinds of oddities. Under normal circumstances, opportunistic traders at hedge funds and proprietary trading desks take advantage of such peculiarities and, in doing so, restore equilibrium. Today, markets are not so efficient.

One obvious manifestation of this is the discrepancy between corporate bond prices and the price of credit risk. Since the collapse of Lehman Brothers in mid-September, bond prices have fallen much more dramatically than the risk of default has risen, creating a yawning gap between the price of credit default swaps CDS and their underlying bonds.

This is a direct result of the market conditions û bond prices are being pushed down to...

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