Armageddon in Corporate Bonds

[Joanne98]

I have been warning everyone about corporate bonds specifically because of rising default risk and rollover risk for quite some time. And indeed Corporate bonds are getting crushed. Here is a chart of Moody's Seasoned Baa Corporate Bond Yield.

Baa Corporate Bond Yields

Moody's tries to include bonds with remaining maturities as close as possible to 30 years. Moody's drops bonds if the remaining life falls below 20 years, if the bond is susceptible to redemption, or if the rating changes.

Chart and text courtesy of St. Louis Fed and Moody's.

Armageddon Prices Fail to Lure Buyers

Bloomberg is reporting 'Armageddon' Prices Fail to Lure Buyers Amid Selling


Credit markets have fallen so far that they are providing a "once in a lifetime opportunity," and investors are still selling.

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor's. Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.

"There has been widespread liquidation of assets that has nothing to do with fundamentals," said Scott D'Orsi, a partner at Boston-based Feingold O'Keeffe Capital, a hedge fund which has $1.3 billion in assets. "Investors in bank debt are being presented with a vast number of extraordinary opportunities; opportunities that I would characterize as once in a lifetime."

About 90 percent of the market trades like high-yield, high- risk, or junk, debt, Garman said in an Oct. 3 report to clients. Prices imply a 5.6 percent default rate, the most since the record 8.4 percent in 1933, he said. Junk bonds are rated below BBB- by S&P and Baa3 at Moody's Investors Service.

"It's quite possible that we had priced in Armageddon," said Robert Gahagan, head of taxable fixed-income in Mountain View, California at American Century Investment Management, which oversees $23 billion in fixed-income assets.
Once In A Lifetime Opportunity

There was indeed a once in a lifetime opportunity, with the key word being was. A quick look at the above Baa chart shows there was a once in a lifetime opportunity to sell when risk premiums for junk shrunk to insanely low levels. That opportunity occurred between 2005 and 2007. Everyone was foolishly chasing yield then, at ever ridiculous risk spreads in spite of rapidly deteriorating fundamentals in housing, commercial real estate, and the global economy.

In terms of buying corporate bonds, the Baa chart above is back where it was in 2001, essentially where it was 7 years ago. We will take a look at fundamentals in just a bit but first let's consider performance along the yield curve.

Corporate Bond Performance Along the Yield Curve

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