A commenter recently asked my estimation of high-yield spreads, so I’ll give it. But first, let’s go over the facts. First, rubbish is not like the boring old corporate and business bonds I’m more associated with. If you take two high quality corporate names in similar industries, like Bear Lehman and Stearns Brothers, they will jointly have a tendency to move. That’s because almost all investment-grade companies are in good financial shape, the likelihood of default is remote. If Lehman Brothers misses cash flow by 5 cents, it doesn’t really change anything about their credit history. It would have a either severe change of fortune or a very sustained period of poor performance to take down an organization like Lehman.

So bonds have a tendency to move from day to day on the overall market appetite for corporate and business risk, and less on anything company specific. Junk is completely different. Those companies have weak financial relatively, and it wouldn’t take as much to push them into default. Junk bonds move more like stocks: there is a general market component but gleam quite strong company specific component.

That means if you are good (or lucky) you can pick the right rubbish bonds and perform quite nicely even though spreads generally are widening. Now, I could make an argument that a lot of “successful” rubbish managers have been more lucky than right, but that’s a post for another day.

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Below are rubbish spreads are very tight in comparison to recent background. They aren’t as restricted as many people seem to think. Take a look at the graph below. The blue collection represents the current swap spread (spread over LIBOR swaps) and the green series is the median for this time period. I used the Merrill Lynch High Yield Master Index.

The current spread is 276 and the median is 340. So the current spread is about 66bps tighter than average. Looking at the graph, though, it’s hard to say if the median is a good indicator of “typical” spreads. 500. So I’m not sure historical averages tell the story. I strike the relevant question a different way. In order to truly have “constructed” for the losses, I figure the high-yield portfolio must perform at least and a portfolio of AAA/AA corporates. This is why the swap can be used by me spread as the basis for the analysis.

If you utilize Treasuries, then you are really ignoring the principal alternative to a high-yield collection: an investment-quality corporate portfolio. Then I use Moody’s data to calculate when each reduction will occur and therefore how much coupon income is lost. So how much passion do you need? The answer is 331bps over swaps.

A good way from where we are now. What does that means that? That if the default and recovery experience over another 10-years are similar to the period of 1983 to 2005, rubbish bonds shall underperform high-grade corporate and business bonds. It is apparent from this analysis that the market is pricing in better than average default and recovery rates for junk-rated bonds. This even though credit conditions have been unusually easy for the last 3-years, which as I’ve blogged before, typically leads to an interval where defaults are unusually high.

Reza Mohammed ran a sizable quantity of exploration companies from his tiny office in Vancouver. The companies experienced the same fax and phone number all, and panel members – one-Anita Algie particularly. Mohammed was an agent in the Vancouver area and earned a qualification in the mid-eighties. Some of the companies he ran included: Tellford Management; Cuda Capital Corp; Titus Capital Corp; Gold Key Capital Corp; etc. The one director that stands out on the majority of his companies was Peter Bourne.

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