A Cautionary Note

While we applaud and are fervent supporters of high yield, our memories are not short. We remember the late ‘90s when bonds were the flavor of the period. Are today’s buyers of this paper any different from their predecessors? They were, after all, both QIBs. Are the buyers deluding themselves that risk is covered by yield? Are the rating agencies doing their job? And, more importantly, how strong are the credit skills and industry knowledge of the buyers? We do recall a discussion long ago with an analyst from a major life insurance company that, in fact, underwrote our life insurance. His analysis was based an overall portfolio approach. By building a portfolio of relatively small amounts of high yielding paper, the overall risk was offset by the total portfolio return.

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