BofAML: Markets Are Once Again Mispricing Tail Risk in Credit
Ghosts of super seniors past.
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Bond bulls seeking a scare just two days before Halloween need look no further than Bank of America Merrill Lynch, which offers up some financial crisis-era parallels for investors in junk-rated U.S. corporate debt.
Analysts led by Rachna Ramachandran peer deep into the structure of Markit's CDX HY, a derivatives index tied to the creditworthiness of high-yield corporate bonds and which is divided into layers of seniority known as 'tranches.' The tranches at the bottom are more vulnerable to corporate defaults and losses, while those at the top are in theory more insulated. You can see the theoretical structure in this Markit diagram.