Distressed junk bonds hit five-year high

12 September 2008

Increasing numbers of European junk bonds are being traded at distressed levels, a new study shows.

According to Merrill Lynch's latest Euro High Yield Constrained Index, around 30 per cent of the high-risk bonds can be currently categorised in this way.

This is the highest proportion of distressed bonds since 2003.

The latest index chimes with recent research from Moody's, which predicted that 2.3 European speculative-grade corporate bonds would default in the next 12 months.

This is well up from their current default level of 0.7 per cent.

Speaking to Bloomberg, Karl Bergqwist at Gartmore Investment Management commented: "Typically, those levels of distress would indicate that defaults are going to rise."

"We think there's much worse to come. Spreads could go a lot wider and defaults are undoubtedly going to go up."

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