Capital Markets

Junk Default Rate at Eight-Year Low

The spread between junk bonds and Treasuries has narrowed to about 400 basis points, compared with 457 points three weeks ago.
Stephen TaubJune 8, 2005

The junk-bond market is looking brighter than it has in years. According to Moody’s Investors Service, the global speculative-grade default rate dropped to 1.9 percent in May, compared with 2.3 percent in January and 3.6 percent a year ago — and lower, in fact, that it’s been since July 1997.

So far this year, 11 issuers (8 based in the United States) have defaulted on a total of $2.9 billion of bonds.

Moody’s added that it expects the global default rate to rise, but only to 2.1 percent by the end of this year and to 3 percent by the end of May 2006.

The environment still looks especially attractive to issuers, however. The spread between junk bonds and Treasuries has narrowed to about 400 basis points, compared with 457 points three weeks ago, according to Reuters, citing data from Merrill Lynch.

Spreads narrowed after investors realized that General Motors Corp. and Ford Motor Co., which lost their investment-grade ratings in May, did not overwhelm the junk-bond market with new supply, the wire service observed.

Little wonder that Qwest Communications International Inc. announced that it plans to sell $1.25 billion of notes this week, the largest U.S. junk-bond offering since March, according to Reuters. Qwest stated that it plans to use the proceeds for general corporate purposes, including repayment of debt, as well as funding and refinancing investments in the company and its subsidiaries’ telecommunications assets.

Frequent borrowers, as well as companies in hot sectors such as homebuilding, have tapped the junk-bond market in recent days, the wire service added. “With prices on the upswing, spreads narrowing, and yields down, very typically you see issuers take advantage of that cheaper funding,” Christopher Garman, head of high-yield strategy for Merrill Lynch, told the wire service.

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