Magazine article Global Finance

Bond Sell-Off Spares High-Yield Debt

Magazine article Global Finance

Bond Sell-Off Spares High-Yield Debt

Article excerpt

The high-yield corporate debt market was unscathed by the dramatic sell-off in the US treasuries market in early December that followed news of President Obama's deal with congressional Republicans to renew the Bush-era tax cuts and extend unemployment benefits. The debt deal could stimulate US economic growth and lower the likelihood ot defaults in the corporate bond market, analysts say. As a result, spreads on high-yield bonds narrowed versus US government debt, offsetting the effect of higher rates and cushioning the impact of the debacle in the bond market.

The corporate default rate in the US fell to 3.47% in November 2010, continuing its steady descent from a peak of 14.66% in November 2009. according to Moody's Investors Service. "We remain of the view that 201 lwill see very few high-yield defaults, outside of a double-dip recession scenario, winch seems increasingly unlikely given Federal Reserve policy and the nearly complete deal on tax-cut extensions," Moody's said in a report.

The global speculativegrade default rate fell to a two-year low ot 3.3% in November 2010 and is expected to continue falling to 1.8% by November 2011, Moody's says. Corporate defaults are falling as the economy recovers, profits increase and the debt markets remain open to lower-rated borrowers, it says.

"However, there are risks that defaults may increase, particularly if financing becomes scarce in the European markets," says Albert Metz, Moody's director of credit policy research. …

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