Bloomberg News

Fridson Says Junk Bonds Compensate Investors for Recession Risks

October 24, 2011

Oct. 24 (Bloomberg) -- U.S. junk-bond relative yields are adequately compensating investors for the possibility of a recession, according to Martin Fridson, New York-based global credit strategist at BNP Paribas Investment Partners.

Fridson spoke about the effect of the European debt crisis on the high-yield bond market with Sara Eisen and Michael McKee on Bloomberg Radio’s “Bloomberg on the Economy” today.

The extra yield investors demand to own high-yield debt instead of U.S. Treasuries rose to its highest level since September 2009 earlier this month, reaching 9.1 percentage points, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. Junk bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

On the effect of Europe’s sovereign debt crisis:

“If you look at the U.S. high-yield market, you have a risk premium well above average with the risk, as most commonly measured by the default rate, well below average. It’s really too much of a gap to be accounted for by the recession risk in the U.S.”

On asset flows:

“We’ve just had the largest inflow into high-yield bond mutual funds last week since August 2003 -- over $2 billion. The signs that have been evident in the equity market, that there will be some sort of resolution, have been reflected in that sense.”

On recession risks:

“In the U.S. you’re being compensated fairly well for the probability of a recession. In Europe the spreads are wider. It’s very difficult to separate the sovereign risk concerns with recession.”

On France facing downward ratings pressure:

“The trend seems to be going more towards the French rating being more in question.”

--Editors: John Parry, Mitchell Martin

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net;

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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