TY - JOUR T1 - Performance of Distressed Bonds JF - The Journal of Portfolio Management SP - 56 LP - 62 DO - 10.3905/jpm.2008.706243 VL - 34 IS - 3 AU - Martin S Fridson AU - kevin P. Covey AU - karen Sterling Y1 - 2008/04/30 UR - https://pm-research.com/content/34/3/56.abstract N2 - 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 ER -