CHAPTER 14High Yield and Market Makers

Imissed a big part of the high-yield run-up. I even thought that there was an implosion imminent in the second quarter (Q2) of 2010. Boy, was I wrong.

• I underestimated the capacity for debt refinancing.

• I didn’t appreciate the power of extreme monetary policy. I didn’t research economists with useful firsthand knowledge.

• I missed some implications of market-maker derivative books. Over-the-counter (OTC) derivatives are not evil. They function mostly to control market makers’ huge aggregate risk in an increasingly illiquid secondary market.

To begin, credit has some nice features. The price-to-hopefulness ratio common to equities is never a part of valuation. Few people have trouble parting with a bond ...

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