High-yield default rate remain historically low

(August 9, 2005) The default rate on lower-grade global corporate bonds rose to 1.71% in the second quarter, but still remains near the eight-year low of 1.58%, recorded in March, according to the latest data from ratings agency Standard and Poors.

Speculative grade bonds — also commonly referred to as high yield or junk bonds — have a long-term default rate averaging 4.91% from 1981 through 2004, but the all-time low was hit in the second quarter of 1997.

“Expectations for economic stability, relatively favorable financing conditions, and healthy corporate profitability imply a sanguine outlook for defaults in the near term,” said Diane Vazza, head of Standard & Poor’s global fixed income research group. “The global default rate is expected to edge up slowly from its trough before the end of 2005.”

S&P modeling suggests the default rate for U.S. junk bonds will climb to 2.48% by the second quarter of 2006. The average default rate for the next four quarters is predicted to be 2.18%. These predictions are based on the rising proportion of lower-grade bonds issued in 2003, largely in the U.S.

The ratio of junk bond issuance remained high in the first seven months of 2005, making up 45% in the U.S., compared to 43% for full-year 2004 and 31% in 2003.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com