Junk sometimes is just that

Zack Miller — Tue, 08 Jan 2008 14:22:00 EST

Sometimes when the sky feels like it is falling, there's nowhere to hide. I don't actually believe things are crashing but the sentiment is decidedly negative and it's hard to get finance people to smile these days.

We read about investors who have made the decision to cycle out of equities and put more allocation towards fixed income. Given the fact that yield on the 10-year treasury is 3.89%, investors had been looking more towards junk rated bonds to get any form of yield.

Just this morning, Bloomberg has an article about default rates on junk bonds. Moody's Investors Services, the credit rating agency, now expects "the global default rate on high- yield, high-risk bonds, which finished 2007 at a 26-year low of 0.9 percent, will jump more than fivefold by the end of 2008."

The same Bloomberg article quoted Moody's analyst, Kenneth Emery as saying, "The high-yield default rate will increase to 4.8 percent this year and reach 5 percent by the end of 2009 because a weakening economy and ratings cuts will cause more issuers to miss their interest payments."

Bloomberg says that the percentage of issuers with debt trading at distressed levels rose to 11.5 percent, the highest since July 2003. To emphasize how things are worsening, just a year ago, the rate was 4.2 percent.

If it smells like junk, looks like junk and tastes like junk, well...

Zack Miller the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author holds a long term stock position in GOOG.

Junk sometimes is just that originally appeared on BloggingStocks on Tue, 08 Jan 2008 14:22:00 EST. Please see our terms for use of feeds.

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