what is the difference(s) between a speculative grade risk-free (gov) bond and an investment grade risky bond, for instance a corporate vanilla bond?
both has an extent of default risk.
would a speculative grade risk-free (gov) bond resemble an investment grade risky bond?
lol. at least you are funny.
whilst i am being serious.
Clearly, and particularly nowadays, risk-free gov bonds have default risk. modelling them as risky bonds, similar to vanilla bonds, etc, should better account for this.
should also restore appetite for these and such bonds, if they are more accurately priced, according to their true risk nature.
As long as printing presses exist, default isn't as risky as devaluation risk. Currency debt locks in illiquidity at a time currency is depreciating. Dividends may be a better play
i would consider it coming to printing presses as (a form of) default, and would model it as such.
hence, instead of waiting months/ years for the country and its markets to "clear up", i would consider it a default case, and write the bond off - the bond defaulted. whatever i can get for it, is the recovery value.
thus, i would model both devaluation risk and illiquidity as (part of) default risk.
i dont see the issue of dividends as crucial - the gov bond becomes/ resembles a coupon-less corporate bond. dividends too are not guaranteed, and have the equivalent risk of the issuer.
BIG (below investment grade) sovereign bonds and IG corp. bonds are apples and oranges. One should not be lead by the fact that they both have credit ratings, to the conclusion that they are comparable. Specifically, the mechanism (or dynamics) that drives an IG corp bond to default has not resemblance to the mechanism that drives a BIG sovereign bond to default.
James Chen ,
"Specifically, the mechanism (or dynamics) that drives an IG corp bond to default has not resemblance to the mechanism that drives a BIG sovereign bond to default."
true. but as reduced form models also indicate, you are only truly interested in the probability of default, to accurately price the bond.
i wonder, the probability of default of a speculative grade gov bond may be comparable to the probability of default of an investment grade bond.
At any time, the probability of a speculative grade gov bond may be numerically comparable to the probability of default of an investment grade bond, however, this doesn't mean these two securities are comparable. Because the variability of these two default rates are intrinsically different, and their consequences of defaults (i.e., recovery rates) are also different. Your original question highlights the fact that bond fund managers bet on BIG sovereign bonds are closer to gamblers than traditional credit investors.
James Chen ,
reduced form valuation models would argue that the default probability values/ figures (%) are sufficient.
I dont see why different recovery rates would affect valuation, as this can be defaulted.
i would agree to different variation or variability in default probability, or in general, associated with these 2 types of bonds. this should be examined and quantified, for proper comparison.
the possibility that speculative grade bonds may be comparable in default probability (%) to investment grade bonds, is already remarkable and significant, to me. this may be something that is overlooked, yet of importance and significance.
"Your original question highlights the fact that bond fund managers bet on BIG sovereign bonds are closer to gamblers than traditional credit investors."
this is rating agency rhetoric. they refer to certain "quality" of bonds as speculative (versus investment grade). i would question whether it truly resembles gambling, particularly if the default probability values (%) are comparable. so what is commonly perceived as gambling, may in fact not be. And that is my original question or point. Are speculative grade gov bonds truly speculation/ gambling, when comparing their default probabilities (%) to investment grade corporate bonds?
- Badges
- Science topic
- Similar topics
- Mathematics