(October 18) – Faced with unrelenting bad news, the U.S. corporate-bond market is staggering through its worst period since the bleak days of 1998,” writes Gregory Zuckerman in today’s Wall Street Journal.
“Though it had been a strong year for corporate bonds until recently, investors’ losses have mounted of late, corporations are finding it difficult to sell their bonds and Wall Street dealers are becoming gun-shy about trading them for fear of getting stuck with bonds while prices are falling.”
“If the problems get worse, the U.S. economy could feel the pinch as companies find it difficult to raise financing.”
“Treasury securities, the safest bonds, still sell like hot cakes (they rallied Tuesday as stocks continued to fall). But other, riskier bonds suddenly are struggling.”
“Taking the biggest hit: junk bonds, otherwise known on Wall Street as high-yield bonds, a major source of capital for many growing companies that pose a higher credit risk. The proportion of junk bonds trading at distressed prices surged during the past month to the highest level since the early 1990s, when the market was paralyzed by recession and the collapse of Drexel Burnham Lambert.”
“Nearly one in four junk bonds is trading at distressed levels, defined as yielding 10 percentage points or more over Treasurys, says Martin S. Fridson, chief high-yield strategist at Merrill Lynch & Co. The distress ratio ‘is a leading indicator of the default rate [for corporate debt], so it suggests some further pain coming,’ Mr. Fridson says.”
“The overall bond market isn’t in the same shape as in the fall of 1998, when the market seized up and many issues stopped trading altogether because of the Russian debt crisis. But slumping stocks, and the prospect of a slowing economy and higher default rates, have much of the bond market on edge, resulting in difficult trading conditions that are starting to resemble that period.”