Junk Bonds

Yago, an economist then at the Milken Institute's precursor institutions, wrote an empirical defence of the high yield bond market against the political and regulatory attack it faced after the Drexel collapse. His argument is that the market financed growth companies that could not access investment grade credit, and that the political reaction destroyed a useful institution.

His evidence concerns what high yield issuance actually funded. Yago analyses the use of proceeds across issues and argues that the majority financed capital investment, expansion and refinancing rather than hostile takeovers, which were a small share of volume though they dominated coverage. He documents the employment and investment records of high yield issuers relative to comparable investment grade firms and argues the issuers grew faster and added more employment. He also examines default rates and argues that returns to high yield investors, after defaults, exceeded investment grade returns.

He attributes the market's collapse to regulatory action, specifically the requirement that savings institutions divest high yield holdings, which forced simultaneous selling into a market with no other buyers, rather than to any deterioration in credit quality.

The book is advocacy from an institution funded by the market's principal figure, and readers should weight it accordingly. Subsequent research has confirmed parts of the argument, particularly that takeover financing was a minority of issuance and that forced divestiture worsened the collapse, while the claims about issuer performance rest on comparisons whose selection is disputed.