[player24]

General Motors is not technically a "high yield" bond because it is still not rated below investment grade by any of the major credit rating agencies. But it is one notch from "high yield" and the market is expecting a downgrade to below investment grade.

Because of the company's enormous cash balance, there is materially less risk in short maturity GM debt than long maturity debt. Default risk in a three year window is low/moderate. Longer term, risk rises considerably.

GM 6.125% notes due 2008 are offered at 94.62 which translates to a yield of 8.34%. You will not get a 10% yield without moving further out the curve (i.e. longer maturities, much more default risk).

GM represents about 2% of the entire outstanding principal of investment grade bonds. If/when the next ratings downgrade occurs, some institutional investors will be forced to sell the bonds. The buyers will be high yield investors, including mutual funds, pension funds, insurance companies, hedge funds, etc... There is great concern in the market that selling pressure will continue to push the bonds lower in price. The bonds have been trading off steadily for the past few weeks and the selling has accelerated in recent days.

GM's cost structure is way out of line with current market share and the company's new vehicle lineup will probably result in even greater loss of market share. Labor costs are extremely high because of UAW contracts which grossly overpay workers and do not expire until 2007. GM is simply not competitive and the situation is likely to get worse before it gets better.

Never ever ever ever concentrate your financial assets in a single corporate bond, regardless of credit quality. Diversification is the only free lunch in investing, especially in corporate bond investing.

Long term historical default rates in the high yield market are about 5% and the range is 1% to 14% (default rate was only 1% in 2004). Keep in mind that default usually results in bankruptcy, but this does not mean you lose your entire investment. On average, defaulted corporate bonds recover about 40 cents on the dollar. The results are better for secured debt.

Probably more info than you need/want. I believe the risk and return on GM bonds are fairly well balanced at current prices, but I would never consider this investment except in the context of a well diversified portfolio.