The State of the High Yield Bond Market: Overshooting or Return to Normalcy?

Abstract

During the early 80's, junk bonds played an important role in financing middle market companies. This article furnishes evidence that high-yield bonds are returning to the middle market after a long period of serving as the handmaiden of the M&A market. Noninvestment-grade bonds have proven their merit not only as a diversifying asset but also in a risk/reward comparison with other classes of securities. Default rates have declined markedly, and spreads versus Treasurys have stabilized. The current boom in high-yield issues is not evidence of overheating but rather a continuation of the high-yield market's longer-term integration into the investment mainstream.