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Tennessee Valley Authority Message Board

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  • marklibera marklibera Jul 7, 2009 10:01 AM Flag

    WAY Too High

    Hi. I just found out about these instruments from someone on another board and I did some research on Quantum Online. Here's what I think in response to your questions.

    Even though the interest payment on these bonds is set at the 30 yr CMT plus 80+ bps, they could still trade in line with the yield on Treasuries. The reason is that even though these are not guaranteed by the US govt, investors may treat them the same as Treasuries, thereby bidding up the price of them until their yield is nearly equal to the yield on Treasuries. The same thing happens with Fannie Mae and Freddie Mac debt -- there is no explicit govt guarantee, but everyone treats them as such. This would cause them to trade with just a slight yield difference, but not as much as when the interest rate resetting mechanism was set when the bonds were first issued. In other words, when these were first issued, the underwriters and TVA thought they would have to offer a spread of 80 bps to get investors to buy these. Now, as Treasuries have come down in yield, and as the US Govt has stepped in to back Fannie and Freddie and invest in the TARP banks and GM etc., etc., investors are searching for arbitrage opportunities to buy a US govt type instrument that has a slightly higher yield. Thus, the traditional yield spread of 80 bps gets narrowed.
    The other reason could be that they have a put option attached. This is an inbedded option that is worth something. It guarantees that the bond won't trade below $25 because otherwise it could be put back to the TVA at par.

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