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@Junkster - Are you drinking from this punch bowl?
1.High yield rates “should be” trading closer to 11.0% than 6.4% to compensate for default risk. And that’s for today’s default rate — we haven’t even hit the peak yet. A no-brainer assessment of how mispriced this asset class is at the moment. In fact, when you look at the 50-year history of the data, you will see that the norm is for the average coupon in the high yield market to be about 500 basis points above the prevailing default rate at any given moment of time. Today, the two levels are dead-even — and another case to be made that appropriate compensation for the inherent default risk is much closer to 11% than it is to 6%.
2.The high yield market seems to be pricing in a default rate of 3.25%, which is half today’s level. Instead of discounting a recessionary default rate, the market is pricing in a default rate we typically see three years into the economic recovery.
To be sure, the stock market is way too overpriced for my liking. But the future earnings outlook is a source of debate, and the bulls have stated their case.And I get it. But high yield bonds —come on, it’s as plain as day. It’s about default risk and getting the compensation you deserve as an investor. But you see — it is the debtor, the borrower, that the Fed is most concerned about... creating this massive gap between the current artificial price and true intrinsic value will not, in the end, serve anyone very well.