Capital Markets

Junk Default Rate Continues Decline

But in the United States, is the default rate bottoming?
Stephen TaubOctober 14, 2004

The default rate for junk bonds continues to tumble.

By Moody’s calculation, the global speculative-grade default rate was just 2.3 percent in September. Although this is in line with August levels, that’s far lower than the figures of 5.2 percent in January and 5.9 percent a year ago. In the United States, the rate edged up from 2.6 percent in August to 2.7 percent in September — but that’s still about half the 5.3 percent figure from January.

And the picture only figures to brighten: Moody’s predicts that the global default rate will fall to 1.9 percent by the end of the year.

Data from Standard & Poor’s presents an even more upbeat picture. By S&P’s calculations, the global speculative-grade default rate was 1.64 percent in September, down from 1.69 percent in August. “The decline in the speculative-grade default rate has been accompanied by a marked easing of lending conditions, as reported in recent surveys conducted by the U.S. Federal Reserve and the European Central Bank,” stated an S&P report.

S&P also predicted that the average default rate for the next three quarters would be around 2.6 percent. That’s lower that the average of 4 percent for the past four quarters, but in the United States, the default rate may be bottoming.

The ratings agency pointed out that since the beginning of 2003, there has been a rising proportion of lower-grade issuance that “serves as an early warning of renewed default pressure two to three years ahead.” In 2004, the proportion of lower-grade issuance in the United States averaged 40.8 percent for the first three quarters — a high figure, according to S&P.

At 45.3 percent, the proportion of lower-grade issuance was also high in Europe in the first three quarters of the year, but S&P added that “the small size of the high-yield market in Europe accentuates volatility and limits direct comparison with the U.S.”