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High Yield Bond Market
Old 11-09-2006, 08:51 PM   #1
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High Yield Bond Market

For those people [or investors] that are students of the high yield bond market:

Defaults and Returns in the High Yield Bond Market: The Year 2005 in Review and Market Outlook

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Dr. Altman has earned an international reputation as an expert on corporate bankruptcy, high yield bonds, distressed debt and credit risk analysis. In this article, Altman and his team provide a comprehensive review of the 2005 high yield bond market. The article provides detailed long-term analysis of the US market, as well as trends in default, bankruptcy, recovery and returns for investors. Against this historical backdrop, the article offers some guidance on expected default rates and market performance in the burgeoning high-yield distressed bond market.
- Alec
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Re: High Yield Bond Market
Old 11-09-2006, 09:20 PM   #2
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Re: High Yield Bond Market

I scanned the tome and didn't see the commentary, how about an "executive summary"?
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Re: High Yield Bond Market
Old 11-10-2006, 05:27 AM   #3
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Re: High Yield Bond Market

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Originally Posted by Brat
I scanned the tome and didn't see the commentary, how about an "executive summary"?
Yes, I would be interested also as I am "loaded up."

JG
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Re: High Yield Bond Market
Old 11-10-2006, 07:45 AM   #4
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Re: High Yield Bond Market

Executive Summary

The year 2005 turned out to be below average for the high-yield bond market with rising defaults, reduced new financings, barely positive returns and lower excess returns versus ten-year Treasuries. The annual dollar denominated default rate increased by more than 2% to 3.37%, based on a mid-year market population size of $1,073 billion. The market size increased by over $100 billion from one year earlier, fueled by a large surplus of fallen angels versus rising stars. The fourth quarter’s default rate was 1.12%, over triple the prior year’s comparable quarterly rate - when the benign credit cycle was clearly still in effect. The annual dollar denominated default rate on leveraged loans (from S&P data) also increased considerably to 3.0% from last year’s 1.0% rate.

Default losses were up to 1.46% based on a weighted average recovery rate of just over 61%. The latter was a slight increase over last year’s 57.7% and is above what our regression model would have predicted. Fallen angel defaults were significant in 2005 with a 2.74% default rate based on six issuers.

New high-yield issuance in 2005 was $97.6 billion, down 34% from the record level in 2004. Returns on high yield bonds in 2004 were 2.08%, significantly below the historical average and just 4 bp higher than ten-year Treasuries. Yield-to-maturity spreads to ten-year Treasuries increased in 2005 to 4.05% - 91 bp higher than last year’s extremely low level, but still 82 bp below the historical average.

The distressed ratio of high yield bonds trading 1,000 bp over the risk-free rate declined by year-end to 4.75% of the market’s size and just 4.1% of the high yield plus defaulted debt markets’ size. This is a relatively low proportion and reflects a combination of low expected default rates by the market and a large amount of previously distressed debt that defaulted in the fourth quarter. Still, the distress ratio was higher in 2005 than at the end of 2004. And, the supply of distressed and defaulted bonds, bank loans and other debt increased by over $100 billion in 2005. Based on our mortality rate methodology on recent new issuance to forecast default levels in 2006, the relatively high levels of new issuance in 2003-2005 rated B- or below bodes for higher default rates in 2006. While still below the historical average, we believe the expected default rate could increase to 3.75%-4.25% in 2006. These forecasted rates are higher, however, than implied rates from end-of-year yield spreads. Our forecasted default rate in 2007 is for an even higher rate - one that is higher then the historical weighted average rate of 4.7%.



fyi - Registration to download is free. There is some interesting historical stuff on default rates, etc.

- Alec
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Re: High Yield Bond Market
Old 11-10-2006, 08:48 AM   #5
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Re: High Yield Bond Market

Quote:
Originally Posted by Mr._johngalt
Yes, I would be interested also as I am "loaded up."

JG
You'll load up on junk bonds, but won't buy a relatively safe large cap value fund? I'm sure you posted on it in the past, so would you link me to your rationale on this?

Azanon
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Re: High Yield Bond Market
Old 11-10-2006, 10:18 AM   #6
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Re: High Yield Bond Market

Quote:
Originally Posted by Azanon
You'll load up on junk bonds, but won't buy a relatively safe large cap value fund? I'm sure you posted on it in the past, so would you link me to your rationale on this?
Azanon
Mr. Galt is a contrarian, thinking that "CDs are for wimps", and "Treasuries are for little old widowed ladies"............so he prefers a different approach..........
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Re: High Yield Bond Market
Old 11-10-2006, 10:43 AM   #7
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Re: High Yield Bond Market

I get it. The risk premium for junk bonds isn't sufficient. Buyers are so hungry for short term returns that they are ignoring the principal risk.

For me it isn't just junk bonds, but long term bonds, where risk isn't sufficiently princed.
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Re: High Yield Bond Market
Old 11-10-2006, 12:23 PM   #8
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Re: High Yield Bond Market

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Originally Posted by FinanceDude
Mr. Galt is a contrarian, thinking that "CDs are for wimps", and "Treasuries are for little old widowed ladies"............so he prefers a different approach..........
Well those things are true, but......... junk isnt much better.
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Re: High Yield Bond Market
Old 11-10-2006, 12:25 PM   #9
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Re: High Yield Bond Market

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Originally Posted by Brat
I get it. The risk premium for junk bonds isn't sufficient. Buyers are so hungry for short term returns that they are ignoring the principal risk.

For me it isn't just junk bonds, but long term bonds, where risk isn't sufficiently princed.
Yeah my take on junk and long-term bonds is that the risks are too much for the return potential. As i previously suggested, a large cap value fund is along the same risk levels as junk bonds, except historically they're an extra 3% return. I prefer "same risk" but an extra 3% return.

The only use i see for them would be a small part (10% or less) of a diversified portfolio for the purpose of reducing overall volitility.
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Re: High Yield Bond Market
Old 11-10-2006, 01:06 PM   #10
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Re: High Yield Bond Market

Quote:
Originally Posted by Azanon
You'll load up on junk bonds, but won't buy a relatively safe large cap value fund? I'm sure you posted on it in the past, so would you link me to your rationale on this?

Azanon
Here is my thinking re. "junk" (feel free to disagree but I'm not going to debate it). (A) Less volatility (equals more predictability income-wise).
(B) A little bit more safety in the event of a financial meltdown.
For example, there have been bankruptcies where the stockholders
got hosed but the bondholders ( as part of reorg.) came away with
stock in place of their bonds. This may not be enough for most folks
to justify the risk.

JG
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Re: High Yield Bond Market
Old 11-10-2006, 03:05 PM   #11
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Re: High Yield Bond Market

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For example, there have been bankruptcies where the stockholders
got hosed but the bondholders ( as part of reorg.) came away with
stock in place of their bonds. This may not be enough for most folks
to justify the risk.
It is true the creditors get paid before equity holders but I didn't think junk bond mutual fund holders benefited from the junk-to-equity conversion.
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Re: High Yield Bond Market
Old 11-10-2006, 03:55 PM   #12
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Re: High Yield Bond Market

Vanguard's Corp HiYield (junk) bond fund, VWEHX, appears to be on the conservative side of 'junk'.

Much less volatile than the S&P(VFINX). ~7% dividends vs 1.65% for the market fund. I think they have had only one default in the past 5 years (from my poor memory).

That does not mean it will be a good investment going forward - just a point of reference. My portfolio is ~ 27% VWEHX - not sure that is a good thing or not. But, considering it took only ~ 10% hit after 2000 (while still paying ~ 7% div), I don't lose any sleep over it.

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http://finance.yahoo.com/q/bc?t=5y&s...=m&q=l&c=vfinx

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Re: High Yield Bond Market
Old 11-10-2006, 04:22 PM   #13
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Re: High Yield Bond Market

Sorry, my comment missed the mark a bit - that graph goes back to 2002, not 2000.

Still, looking at the 'historical adj prices' in Yahoo (adjusts for divs, cap gains, etc), VWEHX looks to have dipped about 22% from Jan 2000 highs (monthly #'s, didn't break it down to daily high -low). S&P dipped about 40% from Jan 2000 to Feb 2003.

Jon 2000 to Nov 2006, with divs:

VWEHX: up 42%
VFIXN: up 9.5%

Best/Worst 1 yr return:

VWEHX: 29.0% / -5.9%
VFIXN: 37.5% / -22.2%


% year avg return:

VWEHX: 7.48%
VFIXN: 7.13%

I know it is a 'junk' fund, but that looks fairly stable with nice returns to boot.

-ERD50
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Re: High Yield Bond Market
Old 11-10-2006, 07:52 PM   #14
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Re: High Yield Bond Market

At the right price, junk (or most any investment) can be worth buying.

My guess is that today, junk isn't worth it. Instead of owning junk, you could, for example, hold a combination of short term treasuries, intermediate term TIPS, and megacap stocks such as BRLIX. In my opinion, that combination has a better risk/reward ratio, even in the event of a financial meltdown.

Don't forget that junk yield is nominal, where you might consider stock dividend yield to be real, and even expect it to grow faster than inflation.
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Re: High Yield Bond Market
Old 11-10-2006, 07:58 PM   #15
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Re: High Yield Bond Market

I hold Vanguards Hi Yield bond fund in my tax advantaged account. It has been a stellar performer with very low volatility and a relatively high yield. I plan on buying more in January for both my own IRA and DW's.
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Re: High Yield Bond Market
Old 11-10-2006, 08:13 PM   #16
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Re: High Yield Bond Market

Anyone who is considering HY bonds should be aware that you will lose some return from capital loss. For example, Vanguard's HY bond fund has lost about 2-3% per year from capital losses.

Also, all the portfolio modeling I've done shows that HY bonds are crowded out in a portfolio of stocks and corporate/treasury bonds.

- Alec
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Re: High Yield Bond Market
Old 11-10-2006, 08:16 PM   #17
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Re: High Yield Bond Market

ESRBob, FWIW, 2002 was the absolute pit of the junk market, so the fact that VG's fund came through that without a catastrophic loss speaks well of them. The problem now is that there is no fear in the junk market whatsoever. Stupid stuff that will obviously default and cause actual losses is getting bid up near par. I don't know why all of this is happening, but it will eventually be very ugly. No clue on timing, but it will probably come when there is a back-up in the credit derivatives market or a big slide in the USD.
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Re: High Yield Bond Market
Old 11-11-2006, 03:39 AM   #18
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Re: High Yield Bond Market

problem i have with junk is you take on most of the risk of stocks in a down market , have none of the recession protection of treasuries and non of the upside potential of stock

whatever is good for junk bonds is even better for stocks.
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Re: High Yield Bond Market
Old 11-11-2006, 07:33 AM   #19
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Re: High Yield Bond Market

Just found out yesterday that my largest directly owned "Hi yield bond"
is called. I was getting 7.375%.
Doh!

JG
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Re: High Yield Bond Market
Old 11-11-2006, 07:35 AM   #20
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Re: High Yield Bond Market

well theres another reason they are stinkie!
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