It's not as if the cash bond owners are dumb; they are probably a better reflection of the true expectation
of default losses, because they can not be traded as easily.
In general, Treasury bonds can be thought of as a default - free debt claim (not perfectly true, but people think so), while other bonds must carry a margin
for default losses.
Further, by limiting their fixed income purchases to AA bonds or better, the authors ensure that their clients lose money from their lazy investing, when it is well - known that BBB bonds return the best even
after default losses.
-- The inverse is also true — that is, all
loan default losses are first absorbed by the residual equity tranche, then the mezzanine, the BBB notes, and ultimately by the AAA notes (ideally in v rare circumstances).
The program protects
against default losses including repurchase expenses, affecting eligible loans including firsts, seconds and HELOCs.
For those not familiar with managing credit - sensitive bonds, the difference in
likely default losses is minuscule between AAA and BBB bonds.
While real estate might be a product of local markets, probably the single biggest reason for the potential nation - wide real estate slowdown in 2017 are macroprudential measures introduced in late 2015 and throughout 2016 (and possibly stretching into this year, should banks be required to cover a portion of
mortgage default losses).
Never mind the fact that
the default loss rate was 40 % of the industry average.
The tighter spreads get, the more you should raise
your default loss estimates.
The actuary might say that you estimate
the default loss rate over the life of the bond, and the required incremental yield that the marginal holder of the bond needs to fund the incremental capital employed.
The error that the «earlies» made, and I knew quite a few of them, was not recognizing how much debt could be crammed into the financial economy in order to juice returns on fixed income assets with yields lower than likely
default losses.
6) Junk bonds have rallied to a high degree; at this point I say, underweight them —
the default losses are coming, and the yields on the indexes don't reflect that.