Three years when credit was plentiful and corporate earnings tended to be good because of a booming economy, junk bonds were considers a relatively safe investment.
Over the next five years, investing in high-yield securities may be as dangerous and sky-diving without a chute.
According to Bloomberg, “About 53 percent of U.S. companies that issued high-risk, high-yield bonds will default over the next five years, according to Jim Reid at Deutsche Bank AG.”
Default rates on existing debt may not be the biggest problem in the sector.
As the failure rate on high-yield bonds spikes up, the ability of mid-tier companies to raise money will probably disappear. Since credit of all kinds has gone into hibernation many firms which, under normal circumstances, have capital to operate and grow will be starved. This will probably lead to a sharp increase in the number of bankruptcies among American companies.
Yet, another reasons that the recession is accelerating and not leveling off anytime soon.
Douglas A. McIntyre