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Monday, October 27, 2014

The Most Important Fundamental Factor Than Should Affect High Yield Bond Prices Looks Positive

Ultimately the most important risk factor that should be reflected in high yield bond prices compared to investment grade bonds is the risk of default. Effectively high yield bond investors are being paid higher interest because they are taking higher default risk (i.e. not getting paid back).

On that front the recent report from Moody's rating agency is good news for high yield bond investors. As Barrons reports 

High-Yield Default Rate Down To 1.7%, Should Stay Low – Moody’s

Of all the things that make high-yield bonds prone to the occasional market shock, defaults really aren’t one of them for the moment or for the foreseeable future. A Moody’s report out today says the default rate among U.S. companies with speculative-grade ratings fell to a mere 1.7% at the end of the third quarter. That’s near a six-year low and down from 1.9% a quarter earlier, and it’s well below the market’s 4.4% long-term average since 1993. The Federal Reserve’s ultra-low-rate policies since the financial crisis have enabled even the junkiest of junk-rated companies to refinance debt and issue new debt at uncommonly low interest rates...

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