Tags: junk | bonds

Warning: Danger Lurks for Junk Bonds

By    |   Friday, 10 Jul 2009 08:33 AM

The high-yield bond market is headed for trouble, as companies struggle with outsized debt loads, Greg Peters, head of credit strategy at Morgan Stanley, warned.

The recent sharp gains by junk bonds makes the market “incredibly dangerous,” Peters said in a conference call with clients, Bloomberg reported.

The junk market returned a whopping 23 percent in the second quarter.

The yields paid on junk bonds imply a default rate of 13 percent this year, despite the fact that average debt as a percentage of earnings has jumped to an 11-year high, Peters said.

Fitch Ratings forecasted that the default rate may actually hit a record of 18 percent this year, thanks to economic weakness and fragile capital markets, Bloomberg reported.

Peters said about 42 percent of companies rated below investment grade have at least 500 percent more debt than earnings before interest, taxes, depreciation and amortization.

The recent rally by the most debt-laden companies “worries us,” he said.

“I just don’t see the proper risk-reward here,’’ Peters said. “The bet that you’re making in high yield right now is that the consensus forecast for defaults is actually going to come in lower than anticipated. That is a very tough bet to make.”

Others feel the same way.

“The economy is expected to remain weak for months, which can bring on many more defaults,” investor Avi Morris wrote on Seeking Alpha. “Junk bond funds gained 23 percent in the first half of this year; that pace can’t continue.”

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The high-yield bond market is headed for trouble, as companies struggle with outsized debt loads, Greg Peters, head of credit strategy at Morgan Stanley, warned. The recent sharp gains by junk bonds makes the market “incredibly dangerous,” Peters said in a conference call...
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2009-33-10
Friday, 10 Jul 2009 08:33 AM
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