Hitting rock bottom

With corporate bond spreads tightening to such an extent that many investors are describingthe situation as a bubble, Denis Gould and Julien Fourtou assess the concept of ‘rockbottom’ spreads – the price at which default risk outweighs any value in the bonds

In recent months, spreads on corporate bonds have become so tight that there has been speculation in the media of a bubble in the credit market. Indeed, The Economist recently produced an article warning that “in recent months…investors have been bidding up bond prices to levels that are in danger of becoming as dotty as share prices once reached.”

But unlike equities, bonds have a maximum value – presumably investors will not pay to lend money. Admittedly Berkshire Hathaway, an