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Dash For Cash Ends In Trash

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There is a boom in busts in America — with bankruptcies nearing record levels. The past 18 months have seen some of the country’s biggest bankruptcy filings with the collapse of General Motors, Washington Mutual, Chrysler and Lehman Brothers. Yet since the start of the year, investors have ploughed cash into high-risk, high-yield corporate bonds.

According to AMG, a data provider, there has been a net inflow of more than $11 billion (£6.75m) into so-called high-yield funds this year. In one week last month, the net inflow was close to $1 billion. In Europe, similar statistics are not produced, but high-yield bond analysts say the market has also been booming. The returns have been staggering. European high-yield bonds have produced returns of 47% so far this year. Top-yielding bonds include Taylor Woodrow (now Taylor Wimpey), the housebuilder, whose bonds have generated an amazing 302%.

Investors probably think they are getting a bargain. After all, it is easy to convince yourself that the worst has passed. And it seems the rating agencies are pretty cautious — so there is always a chance that a rock-solid business has been downgraded too far, leaving the opportunity to snap up a fallen star. On balance, however, the high-yield market is headed for a fall. At the end of May, 9.2% of high-yield debt issues had defaulted during the previous 12 months — against only 1% in the boom to December 2007.

Moody’s, the credit-rating agency, predicts the default rate will rise to 13.8% by the fourth quarter. It took more than two decades of boom for the City to rebrand junk bonds as high-yield debt. By the year’s end, investors will remember once again why they earned their original name.

Another bubble going to go pop?

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  • 406 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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