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Why? No recession which kept the marginal firms afloat and forced continuing high interest rates which plagued investment-grade borrowers. Even without a recession, refi is going to knife many of those companies which will ripple out. Mr. Mackintosh identifies three tiers of likely victims, starting with "the obvious disasters: super-speculative also-rans that financed themselves in the final stages of the post pandemic boom, mostly using SPACs, plus some debt-financed zombies that should have gone bust but were saved by zero interest rates."...the riskiest part of the bond market has performed the best. The CCC-rated borrowers closest to default have returned 10% this year. The worst-performing are safe investment grade borrowers ... Just as junk-bond investors like the trashiest investments, big stocks with the weakest balance sheets ... are beating those with stronger balance sheets ...
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Comments
Thanks David. Great post. That’s the sense I’ve been getting, but don’t have much experience in this area. Junk can hold up well for long periods, even as equities languish, and than tank badly. Can give a false sense of security sometimes.
M* "quant" (ie AI) analysis is embarrassing. You would think they would limit using it to traditional vehicles, not alternative investments
From the end of May a very ominous forecast for the default rate on both junk bonds and loans in late 2024. If the default rates of 9% and 11.3% comes anywhere close to reality it would be one bad bear market for junk and bank loans. One positive is I have a treasure trove of such predictions over the past decade of the eventual demise of these markets based on default rates, debt maturity walls etc. that haven’t come close to reality.