Cross currency relative value in corporate bonds
Hi,
I have a question for fixed income geeks :)
How to do relative value between corporate bonds in different currencies ? Let's say same credit quality, same issuer etc... everything the same but the currency: the $ one pays a spread (z, oas vs swap, asw whatever...) of 220 and the € one pays 200. Can you say directly that the $ one is cheaper ? Or do you need to adjust for the cross currency basis ? I was told to do so, for example easily using XCCY or other functions under bloomberg but I struggle with the logic: for a company who needs to issue debt, sure this needs to be taken into consideration. But for an investor who can pick his bonds anywhere and hedge interest rate curve and ccy risks, can't he just pick the bonds with the higher z-spread ?
thanks
If you decide go to the route of using the fancy stuff, then xccy basis is what you pay or receive for hedging the currency risk. If you swap your USDs for 5 years to invest in JPY bonds, you will get an extra 80 bps for willing to lend USD and hold JPY, so no - you can't say that 220 bps in USD is necessarily cheaper than 200 bps in EUR. I am also not convinced that bonds spreads will or should be identical once you adjust for currency. For example, I see gazpru 3.389 20 with 472 bps z-spread in EUR, but gazpru 3.85 20 with 435 z-spread in USD. A month ago z-spread was 466 bps in EUR and 445 in USD, so z-spread in EUR bond widened by 6bps while Z-spread in USD bond tightened by 10 bps.
I agree, but there is clearly some bonds out there that are cheaper than others, and they are especially easier to spot for big global companies that do not have any issue funding in either currency. Central Banks actions have helped such opportunities to appear by disrupting markets so much imo.
Bonds: Relative valuation (Originally Posted: 11/06/2017)
Hi all! I work in Credit research division and we generally do relative valuation of bond by taking in to account modified duration (x axis) and G-spread(Y axis) of the bonds of the company we are working on and its peers. And finally we plot it on graph and make the trendline. Now can someone please explain that what all interpretation we can make from this graph? For eg let's say that company has majority of its bond is above(or below) the trendline? So at very high level can we say that that its bonds are cheaper(or expensive)? Also what other interpretation and how a fund manager will take a call of investing in the bond on the basis of this chart? I hope I'm clear Many Thanks!!
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