RT Journal Article
SR Electronic
T1 Performance of Distressed Bonds
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 56
OP 62
DO 10.3905/jpm.2008.706243
VO 34
IS 3
A1 Martin S Fridson
A1 kevin P. Covey
A1 karen Sterling
YR 2008
UL https://pm-research.com/content/34/3/56.abstract
AB 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