Goldman Sachs is warning that the lower rated rungs of the junk bond universe are the most overpriced since 2007. Bonds rated CCC and below have one of the highest probabilities of default.
Goldman estimates the credit-risk premium for CCC obligations has sunk to a negative 53 basis points, “even under a fairly optimistic assumption of no recession for the next five years.”
That’s the lowest level since before the financial crisis, when the CRP touched negative 420 basis points in June 2007, at the height of the froth in the global debt market. It suggests investors are likely accepting credit risk without adequate compensation.
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Nine years into an economic and credit expansion probably isn’t the time to load up on CCC rated debt. Buy when there is blood in the streets is the motto to follow in the junk bond market.
