A Junk Bond Depression?

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The default rate on junk bonds in 2007 was well under 1%. Junk guru and finance professor Edward Altman says that number will move well above 4.6% this year. According to The Wall Street Journal "already in January, Mr. Altman estimated defaults hit $3.2 billion, about 60% of the total for all of 2007." That means the level of defaults could move well above 5%, if things stay bad.

Junk bonds, or "high-yield" as Mr. Mike Milken liked to call them, touch a much broader spectrum of the economy than most investors would guess. Not only are high-yield bond funds popular with investors, institutions also own baskets of this debt. It is not terribly unlke baskets of mortgages, credit card, or auto loans.

Companies financed by junk bonds employ a lot of people. Quebecor (NYSE: IQW) which recently defaulted on some of its bonds, employees several thousand people. Sirva (NYSE:SIR) has 4,600 workers. It has had trouble making debt payments. Junk debt helped finance big newspaper chains including McClatchy (NYSE: MNI) and Journal Register (NYSE: JRC)

To make the point, companies financed by junk bonds employ hundreds of thousand of people and have suppliers who employ hundreds of thousand more.

A rising junk bond default rate is an early indication that empoyment numbers may begin to head in a bad direction.

Douglas A. McIntyre