Comments (6)

 
Mar 19, 2013 - 7:52pm

There's no rule against it, but it can be tough for a few reason:
a) Corporate bonds are in high denominations (usually $1000 and up) so making trades at low levels is hard
b) Corporate bonds are less liquid than equities with each issue traded OTC by market makers, most of whom won't care to do business with anyone not making large trades and/or will give you shitty pricing

 
Mar 19, 2013 - 7:42pm

To trade bonds you need to be an decently sized institutional investor. Like have $50mm of balance sheet, if not more. Reason being is to get decent pricing you have to trade in blocks of $1mm and greater, but if those aren't deterrents then go ahead.

And Corporate bonds are liquid not as liquid as equities with actual quoted prices at exchanges but they are not any where close to other parts of the bond market.

 
Mar 20, 2013 - 11:57am

mrb87:
I don't think you even know what you're asking. Trading "equity spreads"? And you don't trade "bond spreads", you trade bonds on spread, which wouldn't be logistically different than trading bonds, you'd just hedge yourself by selling treasuries short.

I think he's talking about capital structure arbitrage. Cases where, for some reason or another, debt and equity in a company trade at wide spread e.g., the bonds are trading as if default is imminent yet the equity is trading as if there is low probability of default. You can trade this by buying the bond and shorting the equity as eventually the spread must close. If the company defaults, you make money on your equity short (and default was already priced into your long bond position). If the company does not default, you make money on your long bond position, but lose some on you short equity.) Einhorn has been known to do this - see Fooling Some of the People All of the Time.
 
Mar 20, 2013 - 7:06pm

Boothorbust:
mrb87:
I don't think you even know what you're asking. Trading "equity spreads"? And you don't trade "bond spreads", you trade bonds on spread, which wouldn't be logistically different than trading bonds, you'd just hedge yourself by selling treasuries short.

I think he's talking about capital structure arbitrage. Cases where, for some reason or another, debt and equity in a company trade at wide spread e.g., the bonds are trading as if default is imminent yet the equity is trading as if there is low probability of default. You can trade this by buying the bond and shorting the equity as eventually the spread must close. If the company defaults, you make money on your equity short (and default was already priced into your long bond position). If the company does not default, you make money on your long bond position, but lose some on you short equity.) Einhorn has been known to do this - see Fooling Some of the People All of the Time.

Thanks for the primer on capital structure arbitrage.

In any case he is using awkward terminology which means he probably wouldn't know what he's doing.

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