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Race to Zero in High Yield Credit

The average annual credit loss in high yield bond portfolios was 2.65% between 1992 and 2011.  During that same time period, your average yield for taking that credit risk was 10.25% and your average option adjusted spread was 5.7% .  Today, that total yield has dropped to 4.96%

High Yield - The New Risk Free Asset Class

At 4.96% you are picking up 4.04% above a comparable tenor in US treasuries.   With a 2.65% average credit loss, you are expecting a 1.39% risk premium for taking on junk credit risk if we experience historical average credit losses.  Do not worry though, because volatility has been removed from all asset classes.

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