Bond supply misconception

B

Benja001

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Reading 21 says that bond spread tighten when there is big supply coming to the market. Therefore if big supply of bonds issues comes in, you should expect tighteting in the credit spread. This makes no sense at all, it seems to me that the supply is coming because bond sales men see that there is lots of demand from investors to buy bond, therefore they go around companies telling them that it is a good time to issue as they migth get good rates.
Does anyone grasp the supply issue in a different way and that makes sense in a demand/supply relationship and the reading?
Cheers,
 
demand is high -> price of bonds UP -> price up -> bond YTM lower.
Since YTM on bond - YTM on treasury of similar maturity = Spread on bond -> Spread tightens.
Once the Spread tightens - the credit spread (spread between bonds of similar credit ratings) also tightens.
 
exactly. that is how I see it too. Demand is the main driver, however this is how the book present it:
“During most years, increases in issuance are associated with market-spread contraction”
Thanks,
 
but is there anything wrong in what they say - when issuances increase - prices go up - so spreads do contract.
 
tail wagging the dog really. issuances increase because the market is able to absorb them.
 
The bond spread tightening has more to do with the increased liquidity. New supply creates more trading and liquidity around the issue. This makes it more desirable with portfolio managers, who don’t want to be stuck in illiquid issues they can’t get out of. Therefore, they trade into the newer issue with increased supply, push the price up and spread down.
At least, that’s what the reading tells you. A bond trader I’m not.
 
You must log in or register to reply here.
Back
Top