Secular Changes

CFA Level III
#1

Secular changes (Ref: Pg 56, Book 3, Scheweser)

Can any one please explain me, by “dominate” - they mean Callable issues outperform in terms of total return ? or does it mean that they have maximum number issues the high yield segment ? or both ?

thanks!!!

#2

A significantly higher percentage of newly issued credit are intermediate-term and bullet maturity bonds in the corporate bond market as compared to those that are callable / putable and/or sinkable.

#3

thanks you for the clarification, I got it !

#4

A Callable bond offers the buyer of the bond i.e. the investor a discount because the borrower can “call” it away as interest rates decline or the borrower credit quality improves and better terms become available . The lender demands the dscount because it is a prepayment option issued to the lender. The discount is a call premium paid to the lender.

This discount offered takes away some of the proceeds of the loan from the borrower. Generally when interest rates are falling , apart from the treasury declining in absolute terms , spreads also begin to compress , because borrower credit quality begins to improve.

The call option is more valuable to the borrower if they sense credit quality is improving. Conversely the lenders begin to subscribe less and less to callables because the risk of being called away increases ( if borrower qualiy improves they can command lower discounts on new loans and would like to get out of existing higher rate loans )

So callable issues decline because of under- subscription by lenders

#5

phew… it was indeed a deep concept ! I lately convinced myself, just to remember what is written. Thank you so much for explaining it so well, I am sorry I edited my earlier reply without looking into your comment. thanks a lot, you said it very well !!!

#6

What is the difference between cyclical change and secular change?

Thank you

#7

Hi

I do not hold a very deep understanding of these topics…what I could understand by the above two terms is that

Cyclical change : As the suppy of new issues in the bond market increases, it increases the demand of both old and new bonds (because the new bond issues validates the price of old issues as well). And because of the increase in demand of bonds, prices of both old and new bonds increases.

Secular changes : Explained above !

#8

Cyclical means business cycle dependent .secular means long term , slowchanges