Junk Bond Struggle

{Q} If you were to buy now, what sort of time horizon should you have?

I think at least a two-year holding period seems appropriate. I don’t see any catalyst for spreads to suddenly come back [narrow] meaningfully in the near term.

{Q} Is the deterioration of the corporate balance sheets of high-yield bond issuers driving these spreads?

Yes. In the past two years, there’s been a lot of aggressive lending. Businesses have added a lot of debt to corporate balance sheets through leveraged buyouts and borrowing money to buy back stock and to pay dividends.

{Q} Will the federal reserve bank’s decision to inject capital into the economy be a mitigating factor for markets?

I think every little thing the Fed can do will help. What is really critical, though, is that we fix this home-mortgage market. As cheap as our [high-yield bond] market may look, we are not even close to being as out of whack as the residential and commercial mortgage-backed markets.

{Q} What could drive spreads even wider?

Clearly, one thing that could drive spreads wider is a weaker-than-expected economy. Also, the continued drumbeat of problems in the housing and mortgage sectors—and headline risk [could affect markets]. That will probably continue for a while. On the flip side, if we wake up tomorrow and see that we didn’t go into a recession—and that gross domestic product is up and the consumer is still spending—then that could be the catalyst for the market to have a nice rebound.