To judge from the crystal ball of debt markets, next year will bring some incredible calamity, maybe a depression, maybe worse. Bond prices suggest nearly one in five companies with high-yield debt could slip into bankruptcy with certain loans fetching just 70 cents on the dollar. The differences between corporate bonds and Treasurys now stretch beyond some investors' beliefs.
"Spreads are more than ridiculous," said David Kotok, chairman of Cumberland Advisors in Vineland, N.J. "Either we have dysfunctional credit markets evidenced by absurd pricing, or the market pricing is accurately forecasting the Great Depression of 2009, '10, '11, '12 and '13."
With three-quarters of high-yield bonds trading at distressed levels, the market implies a one-year default rate of 18.5%, according to Garman Research. That's worse than most expectations and higher than previous peaks of 13% in 1991 and 11.5% in 2002. Standard & Poor's forecasts a 7.6% default rate in a year from now. The rating agency's worst-case scenario has the default rate hitting 9.6% at the end of 2009.
Emphasis added by me.
This is Forbes writing this, for Christ's sake. Forbes!
Does it sink in yet?