Most who compile data on high-yield bonds have tabulated that returns were
in the low double-digits in 2006, a reflection of continued tight credit
spreads. If I had to list the potential risks for 2007, it would be for a
widening of credit spreads.
I say this with a bit of hesitation, however,
since the economic expansion could well last a few more years, just as there
was a long expansion in both the 1990s and 1980s. In fact, the last
expansion lasted 10 years. If the current expansion lasts a few more years,
investors will project that corporations will easily be able to pay their
debt obligations, hence keeping the yield spread between corporate bonds and
Treasuries tight.
If the current economic slowdown deepens as some expect,
spreads will widen, perhaps sharply given that players are loaded up on one
side of the boat for this trade. Any upheaval of the credit markets would
likely have spillover effects into the stock market.
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Tony Crescenzi Blog Copper Shorts Most Since 2002 12/26/2006 12:32 PM EST It is likely getting closer to its bottom.
Tony Crescenzi Blog Real Estate Loans Flatten 12/26/2006 10:50 AM EST But it is still valid to conclude that there has been an uptick in housing demand of late.
Tony Crescenzi Blog Big News for Bonds 12/26/2006 9:36 AM EST We'll see two data points that should explain the recent rally.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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