BP Getting Crushed: What Does its ‘Yield Inversion’ Mean?
BP shares are down about 5% at last glance. The latest catalyst Friday seems to be a cross-asset read from Nomura suggesting that trading in the credit and stock markets “suggests the market is concerned about a near-term credit event around BP.” Nomura’s lead analyst Alastair Syme writes:
“Creating a scenario that puts near-term liquidity (of US$11bn-plus) at risk looks remote, however we recognise that with an uncapped well, hurricane season and continued media focus the market will struggle to get much comfort.”To make his point, Syme points to the so-called yield inversion in BP’s bonds.
Wait! Don’t let “yield inversion” turn you off! We’ll explain! Short version: Under normal circumstances investors receive a lower interest rate for short-term loans. They get more interest for longer-term loans. Why? The longer-term the loan, the more time there is for something to happen that would interfere with the payback, i.e., more risk. And for investors, higher risk equals higher reward — at least in theory.
That’s under normal circumstances.
But BP’s woes in the gulf are anything but normal. As a result BP’s shorter term debt is now yielding — or paying an interest rate — that’s higher than the longer term debt. For instance, one heavily traded bond, which matures in March 2012, traded with 9.48% yield recently. Meanwhile, further down the curve a bond that matures in March 2019 is trading at a yield of 7.74%, less than the shorter-term bond....MORE