Speculative grade bonds might default at a higher rate than in 1933. Of course the market could be wrong. After all, it was wrong to buy so many of these bonds in the first place.
Dec. 3 (Bloomberg) -- Yields on speculative-grade bonds imply a U.S. default rate of 21 percent, higher than the record set during the Great Depression in 1933, according to John Lonski, chief economist at Moody’s Investors Service.
The extra yield investors demand to own U.S. high-yield bonds was 19.19 percentage points on Dec. 1, according to Moody’s. Assuming a 20 percent recovery rate, the spread implies a default rate of 20.9 percent, Lonski said yesterday in a market commentary. That compares with a rate of 11 percent in January 2001, 12.1 percent in June 1991 and 15.4 percent in 1933.
There's the default rate on junk bonds. But there's also the percentage of all bonds that junk bonds represent. Anyone have an idea where we stand on that score?
According to Deutsche Bank, current spreads imply a 50 per cent default rate for high-yield credits and an "inconceivable" default rate for investment-grade companies: government intervention to prevent defaults on such a scale, they believe, would be inevitable.
The high interest rates charged to higher quality companies are most interesting. Do these higher rates accurately forecast future default rates?
It is by far the worst I've seen in the 35 years I've been in business. It's just gone right off the cliff. For retailers, I don't think there's going to be any Christmas to speak of. Some of our high-end retailers reported sales down 25%.
That big sales drop means lots of manufacturers and retailers will go bankrupt in 2009. How many? BorgWarner CEO Timothy Manganello is planning for a long recession.
We're preparing for nothing good until mid-2010. If things get uglier, it's possible it won't improve by then.
Junk-bond yields are at unprecedented high levels. As rattled investors dump everything but U.S. Treasury bonds, the average yield on below-investment-grade debt is over 20% for the first time ever.
So far massive US government intervention in financial markets hasn't stopped the contraction. Will the US government just keep upping the ante? By that point will inflation break out in a big way?
Some people are still deluded that we can put the Humpty Dumpty back together again. Harvard economist Edward Glaeser says that lending subsidies can't restore housing prices back to their distorted highs.
THE GREAT housing cycle of the aughts - the 73 percent increase in housing prices between 2001 and 2006 and the 22 percent decline since then - was built on three illusions. Too many homebuyers thought housing prices would go up forever. Too many investors thought they could lend without risk to subprime borrowers. Too many policy makers thought the magic of subsidized credit could permanently achieve a vote-winning trifecta of bigger homes, rising prices, and more homeownership.
The cruel reality of the market has shattered the first two illusions, but somehow the misconception persists that more lending subsidies can take us back to the housing markets of 2006.
|Share |||By Randall Parker at 2008 December 04 11:01 PM Economics Housing|