Junk bonds are a risky investment because they are so volatile. While a lot of money can be made with them, there is a lot to be lost as well. Junk bonds are also an indication of how an economy is doing based on how many junk bonds are trading in distressed territory. Well, this week there are less junk bonds in distressed territory than at any time in the past three years.
Many investors stay away from junk bonds because they are so risky, but then there are those Type-A personality investors who love the thrill of investing in junk bonds. Junk bonds are also important for determining just how the economy is doing based on how many are trading in distressed territory. This past week, evidence that financial stress is beginning to lessen was found in the fact that distressed territory junk bonds are at their lowest levels since December 2007.
Currently, 9.7 percent of junk bonds are trading in distressed territory. This is a big improvement over last month, which saw 12.7 percent of junk bonds trading in this territory. How can a junk bond be distressed? Well, when the bond’s yields exceed 10 percentage points over that of the U.S. Treasuries, they are considered to be in distressed territory.
For economists, distressed junk bonds are a good indicator of future bankruptcies because when the yields of junk bonds go up into distressed territory, there is a greater risk of default. Naturally, in 2008 there was a massive amount of bankruptcies that corresponded to distressed debt volumes.
Things are expected to get better from here on in for junk bonds as well. The junk bond default rate is expected to fall to only five percent, half what it was in February, by the end of the year. In terms of sectors though, distressed junk bonds are found the most in the technology, media, entertainment and insurance sectors. Roughly 32 percent of junk bonds are in the high-tech industry, while media and entertainment junk bonds account for just fewer than 22 percent. Insurance junk bonds are at 21 percent.
Distressed junk bonds are a good indicator of how the economy is doing, and when the number of distressed junk bonds falls, there is less of a risk of defaulting and bankruptcy. With the lowest levels in over three years, many investors are looking to the future with smiles on their faces. While the good times may not quite be here yet, they seem to be just over the horizon. There is a light to the end of the recession tunnel and junk bonds are showing us it is near.
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