Magazine article Global Finance

High-Yield Default Rate Coming Down

Magazine article Global Finance

High-Yield Default Rate Coming Down

Article excerpt

The high-yield bond spread over US treasury securities is narrowing in anticipation of a steep decline in the default rate for below-investment-grade companies.

Once the corporate sector is capable of sustaining economic growth, the high-yield bond spread should begin to approach its 473-point average of the previous two economic recoveries, says John Lonski, chief economist at Moody's Investors Service.

Moody's forecasts that the US trailing 12-month high-yield default rate will decline from November 2009 's peak of 14.5% and February 2010's 12.7% to 3.3% by the end of this year.

"Monetary stimulus, the biggest fiscal stimulus jolt since World War II, and extraordinary efforts to assure an adequate supply of financial capital have improved the outlook for debt repayment," Lonski says. "Occasional broadenings of the high-yield spread are possible until the US economy shows that it can grow without extraordinary assistance from Washington," he adds.

Long-term investment-grade corporate bonds were yielding 119 basis points more than comparable treasuries recently, while the high-yield bond spread was a more generous 597 basis points. Investors seeking higher yields have been scooping up heavy issuance in the high-yield market this year.

Some $15.8 billion of high-yield bonds, including public offerings and private placements, came to market in February, according to Montpelier, Vermont-based KDP Investment Advisors. That was only slightly below the $16.5 billion total for January, despite nervousness related to the sovereign debt crisis in Europe. …

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