What’s one way to know that distressed debt has become too popular a trade? There’s less and less debt qualified as ‘distressed’ because buyers have bid-down yields too low for too many issues.
Distressed Debt Investor (DDI) points out how to be classified as ‘distressed’, debt must trade a yield that is 1000 basis points above U.S. treasury yields. Thus rising treasuries and rallying distressed bonds have removed many issues from the ‘distressed’ classification.
The chart below shows how the number of issuers classified as ‘distressed’ has fallen:
“This represents the number of issuers whose distressed bonds traded during the previous day’s market. Distressed is defined as any bond that trades at greater than 1000 basis points over the benchmark treasury.”
Now we wouldn’t be surprised to see that there were substantially less bonds trading as distressed right now versus, say February 2009. What surprised us was how much the universe continued to shrink since December of 2009, even after massive rallies for distressed debt earlier in the year.
You can see in the chart below how we went from over 200 to just 128 issuers since mid-December:
Rising U.S. treasury yields have played their part here as well, but suffice to say that for investors jumping into distressed debt funds these days they are crowding into an increasingly tight space.
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