Diving into the history of Morgan Stanley’s first bond deal, our
Head of Corporate Credit Research Andrew Sheets explains the
value of high-quality corporate bonds.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley.
Today, a look at the first bond that Morgan Stanley helped issue
90 years ago and what it might tell us about market
uncertainty.
It's Thursday, October 9th at 4pm in London.
In times of uncertainty, it's common to turn to history. And this
we think also applies to financial markets. The Great Depression
began roughly 95 years ago. Of its many causes, one was that the
same banks that were shepherding customer deposits were also
involved in much riskier and more volatile financial market
activity.
And so, when the stock market crashed, falling over 40 percent in
1929, and ultimately 86 percent from a peak to a trough in 1932,
unsuspecting depositors often found their banks overwhelmed by
this market maelstrom.
The Roosevelt administration took office in March of 1933 and set
about trying to pick up the pieces. Many core aspects that we
associate with modern financial life from FDIC insurance to
social security to the somewhat unique American 30-year mortgage
rose directly out of policies from this administration and the
financial ashes of this period.
There was also quite understandably, a desire to make banking
safer. And so the Glass Steagall Act mandated that banks had a
choice. They could either do the traditional deposit taking and
lending, or they could be active in financial market trading and
underwriting. In response to these new separations, Morgan
Stanley was founded 90 years ago in 1935 to do the latter.
It was a very uncertain time. The U.S. economy was starting to
recover under President Roosevelt's New Deal policies, but
unemployment was still over 17 percent. Europe's economy was
struggling, and the start of the Second World War would be only
four years away. The S&P Composite Equity Index, which
currently sits at a level of around 6,700, was at 12.
It was into this world that Morgan Stanley brought its first bond
deal, a 30-year corporate bond for a AA rated U.S. utility. And
so, listeners, what do you think that that sort of bond yielded
all those years ago?
Luckily for us, the good people at the Federal Reserve Bank of
St. Louis digitized a vast array of old financial newspapers. And
so, we can see what the original bond yielded in the
announcement. The first bond, Morgan Stanley helped issue with a
30-year maturity and a AA rating had a yield of just 3.55
percent. That was just 70 basis points over what a comparable
U.S. treasury bond offered at the time.
Anniversaries are nice to celebrate, but we think this example
has some lessons for the modern day. Above anything, it's a clear
data point that even in very uncertain economic times, high
quality corporate bonds can trade at very low spreads – much
lower than one might intuitively expect.
Indeed, the extra spread over government bonds that investors
required for a 30-year AA rated utility bond 90 years ago, in the
immediate aftermath of the Great Depression is almost exactly the
same as today.
It's one more reason why we think we have to be quite judicious
about turning too negative on corporate credit too early, even if
the headline spreads look low.
Thank you as always for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen. And also, please tell a friend or colleague about us
today.
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