Great piece from Tom Brakke’s research puzzle pix called “five years of junk” about the performance of junk bonds from 2008 to present, including the low in 2009. The top panel shows the returns, the middle the absolute yields, and the bottom spread versus treasuries (click to enlarge):
Brakke notes two very interesting things:
First, notice how the market held together for many months up until the Lehman debacle. Not much warning from the market pricing mechanism even as the environment was deteriorating rapidly. Second, these bonds bottomed well in advance of stocks. (For your scorecard, from that bottom to 3/31, the CCCs returned 247%.)
Brakke’s conclusion is also worth noting:
Today we have a situation where investors have flocked in, even as the valuation picture has worsened as the yield cushion against inevitable problems has been depleted. Nothing will necessarily happen tomorrow or the next day, but there’s no margin for error if something untoward does occur.
Greenbackd 
If by “no margin for error” you mean priced for perfection from the investor’s standpoint, I would agree. But from the issuers’ perspective, these junk credits are quite busy taking advantage of this seller’s market, issuing new debt and refinancing old debt at quite attractive rates. And we’ve all heard the stories about how companies are hoarding cash. So some significant fraction of this newly-raised capital is surely sitting on the balance sheet instead of being deployed.
So I wonder if the consequence of those charts above is that low-quality issuers will actually have an easier time riding through the next downturn, given their bulked-up balance sheets and reduced interest burden? Which in some paradoxical way justifies the reduced risk premiums.
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It’s an interesting thought, although you can see on the charts that low rates were available before the last spike, and that still ended in tears. It might be that the extremely low rates available now will make a difference. My instinct is that the low rates are used first for balance sheet repair, and then finally for speculation. The rates might be lower this time around, but the humans remain the same.
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