%0 Journal Article %A Martin S Fridson %A kevin P. Covey %A karen Sterling %T Performance of Distressed Bonds %D 2008 %R 10.3905/jpm.2008.706243 %J The Journal of Portfolio Management %P 56-62 %V 34 %N 3 %X Distressed debt is a large and growing segment of the fixed-income market. In this article, the authors expand the empirical basis for active management with evidence on risk and reward. They calculate a one-year default rate of 22% for the category, whether defined by spread or by price. That rate is more than 20 times as high as non-distressed speculative-grade debt. They also address the longstanding question of whether non-distressed investors should automatically take losses on bonds that fall below a stated price threshold. The evidence on price change argues against this strategy, based on a threshold of 70, but the cost of continuing to hold is a higher default rate than many investors can tolerate. Finally, a strong correlation indicates that distressed investors earn the highest returns on the lowest-priced bonds, but there is a severe penalty for selecting the wrong issues.TOPICS: Fixed-income portfolio management, technical analysis, in markets %U https://jpm.pm-research.com/content/iijpormgmt/34/3/56.full.pdf