Bubbles: Bonds Versus Stocks

Anyway, corporate credit markets began deteriorating around the dot-com peak in early 2000 and continued a fairly steady decline, with occasional sharp bouncebacks, into late 2002. The convertible hedge fund I comanaged was one of the best performers over that period because we’d kept hedges against general credit deterioration in place. High-yield bonds took a beating, with defaults rising sharply amidst a tottering economy. The collapse in technology stocks, more than a few of which had issued convertibles during the bull market, dragged those converts down to busted, pure yield status. Many stocks were trading at less than 25% of their bonds’ conversion prices, thus effectively saturating the high-yield market with more paper at precise....