Investors Will Buy Private Debt…If It’s Backed By The Government


You’ve got to give credit to Emily Barrett at the Wall Street Journal for trying to find a silver lining in the overcast bond market. For months, investors have shied away form private debt offered at anything but extremely discounted prices. The preference all along has been for government debt, pushing the yields down to historic lows.

Last week, however, three banks managed to place $17.25 billion of new debt with investors, and the prices weren’t at the extreme levels we’ve come to expect for financial company debt. “For the first time in its recent historic rally, the U.S. government bond market may face some plausible competition for investors’ funds,” Barrett writes.

The catch is that this debt, while nominally issued by Goldman, J.P. Morgan Chase and Morgan Stanley, is fully back the an FDIC guarantee. That’s the same as saying, more or less, that it is backed by the full faith and credit of the United States government. The fact that it is selling at anywhere above Treasuries would seem to be the striking part of these sales. It’s very clearly an arbitrage opportunity for investors.

What it isn’t is a sign that the market for risk and private debt is back.