London-based research firm Fideres Partners LLP suggests that the process of pricing and selling new corporate bonds may be inaccurate. Corporate bonds’ price in the days after their issuance may hint to a systemic underpricing by major dealers, according to the Fideres report, published last week. The firm estimates that the underpricing of new debt may have cost U.S. companies as much as $18 billion in extra interest in bonds issued between 2010 and 2015 by pulling up their borrowing costs at a time when benchmark interest rates were at low levels. Companies have been racing to sell new bonds to take advantage of low interest rates. The banks who sell these bonds may underprice new bonds in order to make sure they end up in the portfolios of large buy and hold investors who are seen as more reliable. The concessions on new issues may also arise as investors and bankers need to be compensated for the extra risk of holding corporate credit as opposed to safer securities, such as government debt.
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