Minimizing credit risk is necessary
The developments in credit markets since 2000 have shown that a disciplined approach to minimize risk is necessary. This includes the determination of stop-loss marks which have to be defined on a caseby- case basis. Important is the volatility of the particular bond and the risk profile of the portfolio. Aportfolio with a high-yield benchmark will be able
to take the highest volatility but a buy-and-hold strategy is also not compatiblefor such a portfolio if a specific bond has to suffer a huge price loss.
The price mechanism of Fallen Angels and high-yield bonds requires disciplined stop loss marks. Fallen Angels tend to trade on very wide levels prior to a downgrade in high yield but a downgrade will usually induce another sell-off in the bonds so that a significant price fall will occur.
Besides fundamental facts, technical factors play an important role and current risk appetite of investors determines basically a floor for the Fallen Angel. If new buyers arise upswings in price can be significant, supported through positive credit news.
About Me
My name is Caroline Derringer. I work as a professional business advisor and university professor of economy. The content of this blog is based on a series of lectures that I delivered in a few major US universities. They will soon be published as a book, but for the time being you can read them online.
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