Bond auctions are ‘standard issue’ for Governments. Government usually don’t entrust an analyst or bank adviser with setting the price of a long term debt instrument – for good reason: The cost of ‘getting it wrong’ would be high as would be the temptation to under-price, (making the placement easy for the adviser). Therefore, most Governments leverage the transparency and credibility of auctions to issue Bonds.
Corporate bonds are very similar to Government bonds. Surprisingly though, the sound reasoning behind using a market-based price setting mechanism is typically not applied. Similar to Initial Public Offerings (IPO), corporate bonds are regularly priced based on analysis alone. And again similarly to IPOs, pricing corporate bonds can be very much hit-and-miss.
In an in-house study of Corporate Bonds and Hybrids, it became clear that instruments that were not priced by market mechanisms tend to show strong price movements post issue – both up and down. In other words, the market corrected the initial price setting as soon as the instruments were tradable. These price corrections come at a price: an upwards price movement illustrates that the company sourced debt too expensively. A downward curve aggrieves those who just bought into the Bond.