Corporate Bond Risk Premiums Surge on Subprime Mortgage Fallout

looks like the business week cover story from 9th februrary was "just in time" to markt the top........ http://tinyurl.com/yvmze2 :-)

sieht so aus als wenn mal wieder ein cover einer großen zeitung es geschafft hat das top auszurufen. seit dieser geschichte hat sich einiges geändert..... :-)

March 19 (Bloomberg) -- Risk premiums on investment-grade corporate bonds rose to their highest level in more than three months on concern rising delinquencies by subprime borrowers will slow the economy.

The extra yield, or spread, above Treasuries investors demand to own investment-grade bonds widened to 93 basis points last week from 86 basis points on Feb. 26, the day before the Standard & Poor's 500 index of stocks fell by the most in almost four years, according to Merrill Lynch & Co. index data. High- yield, high-risk bond spreads widened to 288 basis points from 258 basis points in the same period, Merrill data show. ....

``There is this elevated level of uncertainty that warns of a worsening of the situation in housing that would doubtless affect the economy at large and weaken profitability and cash flow by enough so that we would see a materially diminishing corporate creditworthiness,'' John Lonski, chief economist at Moody's Investors Service, said in an interview from his New York office.

Moody's forecasts the speculative-grade default rate will rise to 2.7 percent by year-end and 3.2 percent by the end of February 2008 from 1.6 percent. Last month was the first in more than nine years when all high-yield issuers made all their debt payments. ( in the past years their forecast was too conservative, if the trend turns it might be that even the new estimate is too low/in den letzten jahren war moody´s zu pessimistisch (was ich gut nachvollziehen kann), sollte der trend jetzt kippen kann ich mir sehr gut vorstellen das auch diese recht hohe schätzung ebenfalls von der realität eingeholt wird. dieses mal dann allerdings auf der unfreundlichen seite...)

Corporate bond spreads may widen further as companies report their earnings for the first quarter, Lonski and Marrinan said. Investment-grade bonds yield 5.54 percent on average, Merrill data show, compared with 5.58 percent on Feb. 26. ....

Marrinan cut his recommendation on investment-grade corporate bonds to ``neutral'' from ``overweight'' on March 2 on expectations the subprime turmoil will push spreads wider.

Investors take a ``neutral'' position on corporate bonds by owning the same percentage of the debt in their portfolio as is contained in their benchmark index.

thanks to http://calculatedrisk.blogspot.com/

Yield premiums on junk bonds, those rated below Baa3 by Moody's and BBB- by S&P, may surge as corporate profit growth slows, Lonski predicts.

``If there's any sector that deserves a selloff, the high- yield market still seems to be overpriced, especially when you look at the lower rated high-yield bonds,'' said Lonski. ``Credit risk appears to be underpriced.''

Lonski is sticking to his November forecast that high-yield spreads will increase to as much as 400 basis points this year.