Cyclical vs. Secular

Can someone give me a good explanation of the difference for the exam? Thanks.

Secular: Because of technological changes liquidity in bond markets increase in time (it is the longer term trend) Cyclical: During recessions or in reaction to a wave of defaults liquidity in credit markets dry up. (this happens once in a while, but does not totally offset the longer term trend)

Secular change is the structure change of bond market…liquidity, term, callable/putable feature. Cyclical: New issue, supply/demand for the bond market.

Yep!! I have to admit ws’s answer made more sense to me than my own answer. I need a rest.

Cyclical - Bond prices tend to rise during periods of many new issues coming on the market - The new issues drive up bond prices because the prices of the older issues are justified by the new issues. Secular - There’s been a trend towards intermediate bullet bonds. There was also something mentioned regarding the high yield market… unfortunately cannot recall at this time. Do I have this right?

high yield market = callable feature is the dominant feature

thanks former trader… I knew I was missing that!! Won’t forget it for the exam now… that’s why I love this forum! :slight_smile: lol Callable feature is dominant because if rates drop, these firms can call their bonds and get more attractive rates correct?

Yes, but the big factor is that HY market is callable b/c they are hoping to get a credit increase to bump them over into the Investment Grade market which will decrease their Credit risk/spread and they will call their bonds and refinance at a lower cost.

cool… thanks bw for another great explanation.