Special Situations

JUNK BONDS

February 19, 2016High yield bonds, also known as junk bonds, may be priced attractively enough at current levels to qualify as what we call a Special Situation. Junk bonds are the debt of companies that are less strong from a financial standpoint than other companies, and therefore have a higher risk of default. Investment grade companies carry a credit rating of BBB, A, AA, AAA (Standard & Poor’s) or Baa, A, Aa, Aaa for Moody’s). Junk bonds carry a rating of less than BBB or Baa. Because of the greater credit risk, these bonds typically have to offer a much higher interest rate than do companies that are more financially sound. The interest rate spread between junk bonds and U.S. Treasury securities reflects this higher interest rate differential. The spread varies over different economic cycles. The spread, when particularly large, can also be a gauge of the likelihood of an economic recession. Currently, the spread is quite large. Barron’s magazine has an interesting and informative article on the current state of the junk bond market. Please click Barron’s to go to Barron’s magazine. Search for the article entitled: Where a Junk-Bond Pro Sees Upside Now. You may need to subscribe to Barron’s magazine to view the article.