High yield spreads in the 500-600bp range were unthinkable a year ago. Absolutely unthinkable! And now we are there. Scarry! At the same time default rates are unsignificant. How can that be?
I have talked about cov-lites and other inventions in earlier blogs and I think these have something to do with the difference between default probabilities and outright defaults. I wonder when this will change? My guess is second half of 2008. My guesstimate is that we will see default rates above 5% in the high-yield market in one year's time.
In addition to all the other troubles this might cause, I see the untested DCS market as one that will show its true colours in 2008 due to these defaults!
