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Investors take on more risks

Jeremy Hobson Sep 4, 2009

Investors take on more risks

Jeremy Hobson Sep 4, 2009


KAI RYSSDAL: The thing about an economic recovery when it does eventually come is that everything doesn’t get better all at once. Clearly the U.S. labor market is still struggling. Housing at least is not getting too much worse.

But investors in the capital markets — stocks and bonds — they are full of sunshine and light. Since March, they’ve been buying up plain old shares like crazy. And now they’re getting an appetite for more exotic fare as well — things like stock options and bonds with really lousy ratings. We read today that companies in emerging markets whose bonds are rated as junk — that is the riskiest companies in some of the riskiest markets — have sold more debt in the past seven weeks than they have in the last year.

Marketplace’s Jeremy Hobson explains why investors are getting a taste for dangerous living.

Jeremy Hobson: Just like in a casino, on Wall Street, the name of the game is high risk, high yield. If you don’t lose your shirt, taking a gamble can pay off big time.

And Marilyn Cohen of Envision Capital Management says that’s just what’s driving investors right now.

Marilyn Cohen: Bond fund managers that I know as friends in the business are saying they are getting such humongous amounts of money flowing into their funds, they can’t place it, invest it fast enough.

What a difference a year makes.

PIMCO’s Tony Crescenzi says chalk it up to high yields. Corporate bonds are paying 9.5 percent on average — that’s off the highs — but still well above normal. And companies are predicting good days ahead.

Tony Crescenzi: That means more cash flow, more cash to pay back bond investors, so the risks of default have subsided for some companies. They’re not gone completely, though. There are a lot of risks still.

David Wyss: We’re expecting about a 14 percent default rate next year.

That’s David Wyss, chief economist at Standard & Poors. He says 14 percent is risky, but:

Wyss: Frankly, the prices seem high enough to justify taking that risk. You know it’s like you take a whole batch of gambles, some of them are going to fail. But the ones that succeed are going to pay off enough to cover your losses.

Now, before you go putting all your money into risky debt, David Wyss says keep in mind nothing is ever a sure thing.

Wyss: And one thing that bothers us is last summer, things seemed to be progressing this way too. Risk was coming down, we were getting back to normal.

And we all know how that turned out.

In New York, I’m Jeremy Hobson for Marketplace.

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