Comments on: Bond Recovery in Bankruptcies Likely to Be Far Lower Than in Past Downturns http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to.html Mon, 23 Nov 2009 00:03:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Bob_in_MA http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to.html#comment-32123 Bob_in_MA Mon, 12 Jan 2009 15:31:00 +0000 http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to-be-far-lower-than-in-past-downturns/#comment-32123 This is the first time the modern junk market has faced a severe downturn preceded by a severe credit crunch. There are no historic comparisons. In 1929 (even 1974), there was no such thing as junk bond issuance. Junk bonds were all fallen angels.<br/><br/>The recent bond rally is definitely occurring too early and will be seen as a bear market rally, just as with stocks. This is the first time the modern junk market has faced a severe downturn preceded by a severe credit crunch. There are no historic comparisons. In 1929 (even 1974), there was no such thing as junk bond issuance. Junk bonds were all fallen angels.

The recent bond rally is definitely occurring too early and will be seen as a bear market rally, just as with stocks.

]]> By: Jim http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to.html#comment-32110 Jim Mon, 12 Jan 2009 13:52:00 +0000 http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to-be-far-lower-than-in-past-downturns/#comment-32110 Rob Arnott was interviewed in Barron's recently and commented on how hi yield bonds had yields of 20%, and even if you assumed a 20% default rate and fifty percent recovery rate, you'd still come out ahead. <br/><br/>I did a little spreadsheet, and couldn't get the numbers to produce anything near as favorable a result as he described. In any event, the fifty percent recovery rate was clearly too high, based on some Fed historical analysis I found online. It may be that bonds are not as cheap as we (and the efficient market people represented by Arnott) think. Rob Arnott was interviewed in Barron’s recently and commented on how hi yield bonds had yields of 20%, and even if you assumed a 20% default rate and fifty percent recovery rate, you’d still come out ahead.

I did a little spreadsheet, and couldn’t get the numbers to produce anything near as favorable a result as he described. In any event, the fifty percent recovery rate was clearly too high, based on some Fed historical analysis I found online. It may be that bonds are not as cheap as we (and the efficient market people represented by Arnott) think.

]]> By: Anonymous http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to.html#comment-32087 Anonymous Mon, 12 Jan 2009 11:01:00 +0000 http://www.nakedcapitalism.com/2009/01/bond-recovery-in-bankruptcies-likely-to-be-far-lower-than-in-past-downturns/#comment-32087 Pardon my ignorance but does this also explain why CDS spreads have also blown out?<br/><br/>In essence the article is saying the yields have to compensate for the probability of default, and also the expected loss given the default?<br/><br/>Thanks Pardon my ignorance but does this also explain why CDS spreads have also blown out?

In essence the article is saying the yields have to compensate for the probability of default, and also the expected loss given the default?

Thanks

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