It's very hard to price the weakening of covenants.What has changed are the de facto rights of bondholders, especially non-institutional ones (bagholders?) in cases of insolvency and other distress. GM, Credit Suisse, lots of other examples where bondholders didn't have what they thought they had. It's a detailed and complex subject but I believe that corporate bonds do not pay sufficient risk premium (if any at all) over risk-free alternatives.The general expectation is that bonds are less risky and have lower return than stocks. I don't think that has changed.
With the AT1 bonds at Credit Suisse, it said in the Prospectus, paraphrasing "there are circumstances where you might get very little". So the shock was that the Swiss authorities would hold the bondholders to what was said in the Prospectus.
GM was perhaps a genuine surprise arising from the US government restructuring, which the courts permitted.
There is little or no doubt that:
- credit on loose terms is pervasive out there. The move to Private Credit has accentuated that, in that it has pushed corporate bonds even further towards "cov lite"
- general corporate credit has deteriorated
- bonds issued by financial institutions face a much harder position by authorities than pre 2008-bailouts. If you bought the higher yield than a despit, you bought the risk
- there's a lot of Private Credit out there, complex financial structures - it's not obvious, and may not be obvious to the Ratings Agencies, where the risk lies and what quantum it has
I added "default". I think one of the problems is the assumed default risk-free bonds, might not be. We just don't know.It's a detailed and complex subject but I believe that corporate bonds do not pay sufficient risk premium (if any at all) over default risk-free alternatives.
We are in uncharted waters.
The thing is not to panic, but to diversify one's positions to a certain extent.
Statistics: Posted by Valuethinker — Wed Sep 17, 2025 12:57 pm — Replies 40 — Views 3164