Financial History 142 Summer 2022 | Page 27

Financial analyst John Moody , founder of Moody ’ s Investors Service , used the term “ high yield ” at least as early as 1919 .
Michael Milken did not claim to have invented high yield original issuance , but his organizational skills propelled Drexel Burnham Lambert to the top of the league tables .
Former Council of Economic Advisers head Herbert Stein debunked claims that high yield issuance created hundreds of thousands of jobs . redemption . They considered the customary call provisions a “ Heads I win , tails you lose ” proposition for the issuer . If the company prospered , perhaps earning an upgrade from the credit rating agencies , it could retire its bonds at a small premium with proceeds of new , lower-coupon debt , thereby depriving the investors of any meaningful upside . In the event of default , on the other hand , the investors could usually expect to lose the majority of their principal .
Despite these unappealing structural factors , fund managers exuded enthusiasm for the new-style high yield primary market , in no small part because of its foundation myth : The “ Hickman study ” had found that non-investment grade corporate bonds produced higher returns than their better-quality counterparts , net of default losses . Wall Street interpreted this to mean that free money was available to those wise enough to exploit the market ’ s irrational fear of low credit ratings .
Once again , the facts were somewhat at odds with the PR . In 1958 , W . Braddock Hickman published under NBER auspices a study of 1900 – 1943 corporate bond performance . His analysis continued work initiated by Harold Fraine . Hickman did report higher net-of-default returns on issues rated Double-B or lower than on those rated Triple-B or higher . High yield promoters neglected to mention that the lower-rated bonds exhibited no such superiority when returns on “ irregular issues ,” i . e ., those created through contract modifications in already-outstanding bonds and exchanges related to corporate reorganizations , were excluded . That detail cast doubt on the comparability of Hickman ’ s overall sample and the new crop of original-issue high yield bonds .
Furthermore , the high yield proselytizers ’ appraisal of returns without consideration of the associated risk was outmoded by 1977 . A quarter-century earlier , Harry Markowitz had advanced the notion of adjusting returns for risk , as measured by variance . The standard high yield pitch paid no attention to the huge swings in market value periodically experienced by holders of speculative grade bonds .
ICE Indices reports separate average annual returns on fallen angels and original-issue high yield bonds from December 31 , 1996 onward . Subtracting the riskfree mean return ( based on three-month Treasury bills ) and dividing by standard
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