What's behind plummeting values in corporate bonds?

Falling knives: Pimco ponders what explains sharp reversals on credit valuations despite improving fundamentals.

The credit market faces a paradox valuations have taken a dive at a time when market fundamentals are improving. Charles Wyman, executive vice president and head of credit research at Pimco in the United States, says the reason is not fear of default, but of tensions in the high-yield market.

Credit fundamentals remain strong after a sharp recovery that began in 2003, he says. Balance sheets are in good shape, with SP500 companies having generated $50 billion in free cash flow in 2004, or three times the amount on balance sheets in 1997. Default rates hit a peak in 2002 but have fallen to 1997 levels should stay there throughout...

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