Wednesday, December 2, 2009

Debt 50c on the dollar - good luck finding any

The chart below shows the amount of corporate debt that trades at a price below 50 cents on the dollar. This is simply how JPMorgan defines "distressed debt". What's impressive is how demand for fixed income product nearly eliminated this spike in a matter of months. A year ago over $200 MM of corporate debt traded at discounts of 50% or more. Now there is almost none left.

Part of this exuberance in credit stems from falling default rates:

It's a bit of a self-fulfilling prophecy. Demand for fixed income product provides opportunities for refinancing, generating liquidity, extending maturites, and reducing default rates. Falling default rates generate more interest in credit/fixed income. Of course this process can work in reverse as well.
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