Over the summer, we had a brief look at one corner of the bond market that won’t go negative: CLOs.Senior tranches of collateralised loan obligations are typically priced at a spread over a benchmark, such as euribor. But many of them also include so-called “euribor floors”, which mean that the benchmark cannot fall below zero.Three-month euribor is currently -0.42 per cent. If the tranche is structured to floor it at zero, that’s an additional 42 basis points of income in the spread, compared with the pricing of risk and reward elsewhere in the bond market.This week, Owen Sanderson at Global Capital had a fascinating look at the latest machinations in this world. Trading desks are looking for owners of these tranches, so that they can strip out the euribor floors and sell them on.From the
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Over the summer, we had a brief look at one corner of the bond market that