The global default rate can only go one way from here
Data from Moody’s shows that the global high yield default rate fell to just 1.27% in September, the lowest rate since March 1995. The global default rate has now been below 2% for 25 consecutive months, the longest stretch since 1978 (when the high yield market didn’t really exist).
The steady decline in the default rate has been a bit of a surprise – indeed, Moody’s model has been predicting a rise in the default rate for about the last two years. The likely reason for the model’s error is that companies that would have gone bust in previous cycles have escaped this time. In this liquidity-fuelled cycle, investors have been perfectly happy to bend over backwards for companies. Covenants have been broken, which legally allows bond holders to bring in the receivers and sell the company’s assets to recover their money, but investors have instead been happy to waive these breaches. In a worryingly large number of cases, troubled companies have been able to borrow even more money from investors to help them out of a hole.
Events of the past few months have resulted in liquidity drying up, and this almost unlimited supply of funding looks to be a thing of the past. Banks have had severe trouble getting financing lately, let alone rickety junk issuers, and the default rate should tick up as bond investors start to rein in lending.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.




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