Our chart of the month presents data illustrating what has already been acutely felt by mezzanine and other subordinate bond investors – a sharp rise in spreads across all sectors coinciding with the imposition of pandemic-related lockdowns in the United States and around the world. 

Spreads on aircraft leases had already begun widening by the start of March as travel was slowing dramatically well before widespread government-imposed shutdowns began hitting other parts of the economy. Spreads on aircraft bonds soared to 1,800 basis points at the end of March and 2,400 basis points on April 25th. 

Aircraft differed from most other sectors in its spreads continued to widen throughout April. Spreads in most other sectors began reverting closer to normal in April after experiencing the March market shock. Another notable exception to this pattern were timeshare spreads, which also continued widening during April, reaching a level on April 25th four times where they were on March 2nd.  

It is not surprising to see bonds associated with the travel sector of the economy react in this way. Other sectors that did not rebound during April included student, equipment, floor plan and commercial loans. 

Widening spreads naturally correspond with price declines over the same period. 

The spreads in this chart were computed using TRACE data enhanced by RiskSpan’s Market Color application.  

Market dislocations like these are compelling an increasing number of portfolio managers to begin marking their portfolios to model rather than to market. Join us on Thursday at 1:00 p.m. for the webinar, “Valuing Hard-to-Value Bonds” for a lively discussion on some of the ramifications of this change.