brave new world: junk bond rates spike over 20% for the first time...
Posted by
x (aka dmuck)
Nov 20 '08, 03:56
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Average yields on US junk bonds have topped 20 per cent for the first time amid rising concerns about a protracted recession and a wave of corporate defaults.
The spike in yields could have a dramatic impact on economic activity, making new debt prohibitively expensive for companies with credit ratings below investment grade. Such junk-bond issuers account for 17 per cent of the S&P 500 and nearly half the corporate bond market, according to Standard & Poor�s.
�This is really off the charts in terms of anything we have ever seen,� said Martin Fridson, chief executive of Fridson Investment Advisors, an investment management firm specialising in non-investment grade debt.
The yield on the benchmark Merrill Lynch US High-Yield index hit 20.81 on Wednesday after climbing to 20.27 per cent on Tuesday. Before Tuesday, the previous high for the index was 18.66 per cent in January 1991. The risk premium, or spread over comparable Treasury securities, is close to double what it was in 1991, when Treasuries were yielding more than 8 per cent.
Risk premiums on bonds with ratings below investment grade have hit new highs repeatedly in recent months as the credit crunch has grown worse.
Some long-term bonds issued by General Motors, one of the biggest non-investment grade issuers, have been yielding more than 50 per cent.
The latest surge in rates reflected ongoing uncertainty over a bail-out of GM and other US carmakers.
Investors were also rattled by last week�s announcement by Hank Paulson, US Treasury secretary, that the government had decided against buying toxic assets as part of its $700bn troubled asset relief programme.
The rise in yields comes as debt markets are trying to cope with a flood of forced selling by hedge funds and other investors seeking cash to meet demands for redemptions. Banks are also selling assets as they reduce their risk profiles.
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