Profit From Debt Amid a Credit Crunch - Barron's Interview

Barron's interviews Mary Miller, director of T. Rowe Price's fixed-income trading unit. Miller sees continued pressure on credit markets for the first half of 2008 ("We're really not out of the woods"). While default rates on high-yield debt (currently 1%) will likely peak at 5%, they trade at spreads 750 above T-notes, making them a worthwhile bet.

Miller likes the middle of the debt curve -- holdings that mature 5-10 years from now. She says patience and diversity are necessities for fixed-income investors, who should keep an eye on high-quality sectors that have gotten a worse-than-deserved thrashing:

• Muni bonds and high-quality commercial-mortgage-backed securities: The latter has far more downside protection than its current 352-basis-point spread reflects, because corporate lending standards were never close to as lax as those in the subprime market.
• High yield (junk): Compensation is "pretty good" for the risk involved.
• Emerging market debt: Usually equated with high-yield debt, it has outperformed and will continue to do so.
• Corporate debt: Countrywide Financial (CFC) [Bank of America's (BAC) rescue plan should keep it afloat]; British Sky Broadcasting (BSY) [coupon of 6.1% and traded 240 basis points above Treasurys]; Kroger (KR) [a large, seasoned borrower].