Bond yields squeezed by credit default swaps, reports Bloomberg

Bloomberg reports that credit derivatives and CDOs are squeezing returns for bondholders to an all-time low.

The article quotes Lorenzo Isla, head of structured credit research at Barclays Capital in London as saying: ``By expanding the investor base for corporate credit risk, they compress the spreads available to corporate bond investors.''

The diminishing returns on bonds has prompted WestLB Asset Management to plan switching some of its $6.5 billion of bond investments into credit derivatives, according to the article. ``Spread levels are very tight in the cash bond universe,'' said Christian Doppstadt at WestLB Asset Management in Dusseldorf. ``You can't really initiate nice trading strategies using only cash bonds.''

The article quotes Etienne Gorgeon, who manages €5 billion at Fortis Investment Management in Paris, as saying he bought Swedish phone company TeliaSonera's bonds in September when the cost of protection declined. Gorgeon says he's earning about 4.31% a year from the bonds, even after buying credit-default swaps to hedge them. The return compares with a yield of 4.09 percent on similar-maturity government debt. ``It's like a free lunch,'' says Gorgeon. ``You're immune to default.''

Source: Bloomberg