Junk Bonds Back from the Dead

Junk bonds have come back from the dead — and then some. Of all the asset classes, you’d think the market for debt from financially fragile companies wouldn’t fare well during a “credit crisis.” In fact, we’d suspect it would be one of the last asset classes to recover. But no, anything is possible in 2009… Check the chart of HYG, an ETF that tracks the “distressed debt” market.


“I think that high-yield bonds have moved up way too far, way too fast,” says Strategic Short Report’s Dan Amoss. “Like low-quality stocks, many of these bonds are pricing in a return to the bubble economy, when that is clearly not going to happen. I agree with NYU professor Ed Altman — creator of the Z-Score and an expert in distressed debt investing — that the high-yield bond market will not bottom until defaults peak. Defaults will probably not peak before late 2009 at the earliest. The recent rally in junk stocks and bonds was primarily a function of the Fed’s hyperinflationary policies, which have served as rocket fuel powering any risky asset class with momentum, regardless of fundamentals.”