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Historic Changes in the High Yield Bond Market

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  • Frank K. Reilly
  • David J. Wright
  • James A. Gentry

Abstract

In a history that now stretches about four decades, the high yield (HY) market has experienced growth in issuance and out-standings that is remarkable both for its level (about 13% per annum, with HY bonds now accounting for about 25% of the total corporate bond market) and its cyclicality and sensitivity to the broad economy. The HY market has also experienced a notable shift away from B-rated bonds and toward both lower-risk Ba-rated bonds and, to a lesser extent, more risky Caa-rated bonds. Consistent with this development, studies of the performance of HY bonds show Ba-rated bonds experiencing not only lower risk, but also higher returns than Caa-rated bonds, which have produced surprisingly low average returns along with exceptionally high volatility. At the same time, studies of the correlation of HY bond returns with returns on other major asset classes report that all classes of HY bonds (but particularly the riskier B- and Caa-rated bonds) have consistently stronger relationships with common stocks (especially small-cap stocks) than with Treasuries and investment-grade bonds. Copyright Copyright (c) 2009 Morgan Stanley.

Suggested Citation

  • Frank K. Reilly & David J. Wright & James A. Gentry, 2009. "Historic Changes in the High Yield Bond Market," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(3), pages 65-79.
    • Handle: RePEc:bla:jacrfn:v:21:y:2009:i:3:p:65-79
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    References listed on IDEAS

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    1. Kein, D.B. & Blume, M.E., 1991. "Risk and Returns of low-Grade Bonds: An Update," Weiss Center Working Papers 15-91, Wharton School - Weiss Center for International Financial Research.
    2. Edward I. Altman, 1990. "Setting the Record Straight on Junk Bonds: A Review of the Research on Default Rates and Returns," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(2), pages 82-95.
    3. Martin S. Fridson, 1994. "The State Of The High Yield Bond Market: Overshooting Or Return To Normalcy?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(1), pages 85-85.
    4. Asquith, Paul & Mullins, David W, Jr & Wolff, Eric D, 1989. " Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls," Journal of Finance, American Finance Association, vol. 44(4), pages 923-952, September.
    5. Altman, Edward I, 1989. " Measuring Corporate Bond Mortality and Performance," Journal of Finance, American Finance Association, vol. 44(4), pages 909-922, September.
    6. Marshall E. Blume & Donald B. Keim, "undated". "Risks and Returns of Low-Grade Bonds: An Update (Reprint 027)," Rodney L. White Center for Financial Research Working Papers 15-91, Wharton School Rodney L. White Center for Financial Research.
    7. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
    8. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
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    Cited by:

    1. repec:eee:intfin:v:48:y:2017:i:c:p:25-46 is not listed on IDEAS
    2. De Pace, Pierangelo & Weber, Kyle D., 2013. "High yield spreads, real economic activity, and the financial accelerator," Economics Letters, Elsevier, vol. 121(3), pages 346-355.
    3. Pablo Kurlat, 2017. "The Social Value of Financial Expertise," 2017 Meeting Papers 134, Society for Economic Dynamics.
    4. Frank Reilly & David Wright & James Gentry, 2010. "An analysis of credit risk spreads for high yield bonds," Review of Quantitative Finance and Accounting, Springer, vol. 35(2), pages 179-205, August.
    5. Dufour, Alfonso & Stancu, Andrei & Varotto, Simone, 2017. "The equity-like behaviour of sovereign bonds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 25-46.

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