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Why haven't junk bonds dropped more?
Old 06-20-2007, 10:09 AM   #1
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Why haven't junk bonds dropped more?

I thought that the recent increase in treasury yields would have punished junk bonds quite a bit...if an ultra safe note goes from 4.75 to 5.25 then why would you still be willing to take on the extra credit risk of junk for an even smaller spread over Ts? Yet when I compare how the price of VWEHX (vanguard high-yield) has changed over the last three months compared to VBMFX (Vanguard overall bond market) there is not a whole lot of difference and it even appears that the junk fund held up better than the overal bond index.

All I hear is that junk is overpriced and that spreads over like term T's are at all time lows but even with the recent volatility in the bond market this doesn't seem to be correcting itself. What gives? Is junk going to have to start defaulting before anything will change?
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Old 06-20-2007, 10:58 AM   #2
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Is junk going to have to start defaulting before anything will change?
Probably. I think that when the wheels come off the first couple large LBOs done recently it will mark the start of junk troubles.
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Old 06-21-2007, 10:37 PM   #3
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This has been baffling me and downright annoying me as well! How long can the ridiculously narrow credit spreads go on?

Maybe the Bear Stearns liquidation will start the ball rolling....

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Old 06-22-2007, 06:52 AM   #4
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This has been baffling me and downright annoying me as well! How long can the ridiculously narrow credit spreads go on?

Maybe the Bear Stearns liquidation will start the ball rolling....

Audrey
Perhaps. But thus far it seems to be confined to subprime/junky mortgage paper and the credit of those who traffic in such things.

I think it takes a large LBO running into trouble to turn the cycle.
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Old 06-22-2007, 08:47 AM   #5
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vanguards fund is only yielding 2% over current 5 year cds...and 1% over what you could get last year.

Not too encouraging.
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Old 06-23-2007, 08:25 AM   #6
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I think it takes a large LBO running into trouble to turn the cycle.
Good point/insight.

Audrey
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