More evidence that the bond rally may have gotten ahead of itself, especially for the more speculative grades of fixed income. Bond buyers have bid up prices so much that it’s hard to even find a distressed-looking bond, despite the fact that there were tons of these just back in November
Distressed Debt Investor: In November of 2008, there was over $230B of corporate debt trading below 50% of par. Today there is less than $10B. As a per cent of the market, 31.4% was distressed in November and now only approximately 1%. Hence the reason for the title of the post: There is no more distressed – just a lot of high yield.
Bonds were surely oversold in November 2008, but the sentiment pendulum may have now swung too far in the other direction. It’s hard to believe that only 1% of the bond market will end up distressed over the next few years.
What compounds this situation, which Peter correctly alluded to in his presentation, is distressed funds have had a huge year. A huge year is generally followed by capital raising – more capital to the distressed space means asset prices being bid up and IRR’s decreasing.
Where will the distressed bond investors put their money if everything has already run up? If they buy bonds that no longer carry distressed prices, then they won’t have much upside and mostly just be exposed on the downside should these bonds return to their past distressed-level prices .
Which means they’ll probably be forced to pick over the worst parts of the market and pile into the same few choices like sheep.
Of course, as mentioned in previous months, I believe this is a long drawn out cycle and distressed debt will return in force when the wall of maturities in 2012, 2013, and 2014 begin to tumble onto a weaker market where structured credit buyers are no longer forceful participants. But it could happen sooner if economic growth continues to be lukewarm at best.
Even if the economy has a moderate rebound, a positive scenario, more than 1% of bonds are likely to run into serious trouble. This situation just speaks to the high level of expectations priced into bonds currently.
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