Moody’s: Risk 2010 Style Is not Your 2007 Risk
October 26, 2010
Current high yield bond spreads reveal an increased tolerance for risk, though that tolerance is far from the destabilizing levels of previous bull markets, according to a report issued by Moody’s Investors Service Tuesday.
The $27.2 billion in bond issues rated B3 or lower so far this year indicates a market more tolerant of risk, but neither the Caa spread nor other high yield bond spreads show the excessive risk appetite found in the spring of 1998 or June of 2007 markets, according to the report. Most of the issuance in 2007 happened during the first half of the year, when the median yield spread of outstanding Caa-rated bonds averaged 464 bps. The median yield spread at the end of September 2010 was 747 bps.
Also, that most of the junk bonds priced in today's market go towards refinancing is an important distinction that separates today's market from that of 2007. Of a sample study of 57 new issues rated below B3, 43 of them, or more than 75%, were used for refinancing.
“Nevertheless, the record strongly suggests that Caa-rated bonds are very much overpriced vis-à-vis the overall high yield bond market,” Moody’s Chief Economist John Lonski noted in the report.
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