Thursday, December 18, 2008

High yield bonds rally

High-yield bonds had a great day today. They have finally picked up the message that was being sent by swap spreads, which are down significantly from their highs, and more recently from the Fed, which has promised to make money plentiful. Less fear, more confidence, and plenty of money to grease the wheels of commerce add up to a powerful case for junk bonds, since at the very least this combination of forces all but ensures that defaults will not go to the catastrophic levels that were implied in yields of over 20%. Put simply: with cash yielding zero, investors are almost compelled to consider alternative assets. I would expect that the good feelings that boosted the junk bond market today will transfer to the equity market before too long. Excellent news.

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