Liar Loan
Well-known member
A bloodbath in junk bonds could lead to another credit crunch and put upward pressure on yields (ie interest rates). Junk bonds have gotten so expensive that there is almost no risk premium being paid to investors now. The holders of this credit will face the double whammy of huge losses from companies that can't roll their debt over, and losses from the return of risk premia which will cause the value of junk bonds to plummet.
Junk bonds can be fun to own during good times. They pay a high yield and go up in value, but if anybody on TI is holding these in their portfolios, you may want to think about jumping ship when the next bear market in stocks commences. Stocks and junk bonds are highly correlated, and stocks are the "canary in the coalmine" that will announce the next recession before economists officially declare it.
High yield assets are more overvalued than stocks in general, so they will suffer the most losses. Yield chasers will be punished accordingly.
Moody's warns of 'particularly large' wave of junk bond defaults ahead
Junk bonds can be fun to own during good times. They pay a high yield and go up in value, but if anybody on TI is holding these in their portfolios, you may want to think about jumping ship when the next bear market in stocks commences. Stocks and junk bonds are highly correlated, and stocks are the "canary in the coalmine" that will announce the next recession before economists officially declare it.
High yield assets are more overvalued than stocks in general, so they will suffer the most losses. Yield chasers will be punished accordingly.
Moody's warns of 'particularly large' wave of junk bond defaults ahead
https://www.cnbc.com/2018/05/25/moodys-warns-of-particularly-large-wave-of-junk-bond-defaults.htmlWith corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.
The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.
Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.
Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."
In dollar terms, that translates to $3.7 trillion in total junk debt outstanding, $2 trillion of which is in the B1 or lower category.
"Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing maturing debt," Verde wrote. "A number of very weak issuers are living on borrowed time while benign conditions last."