Bond defaults to rise as economy weakens: Fitch

Amid growing concerns about the economic outlook, Fitch Ratings expects more junk bond defaults.

The rating agency increased its forecast for U.S. high yield defaults in 2023 by 25 basis points to a range of 1.25% to 1.75%.

The change comes in the wake of a downward revision in its growth forecast for the U.S. economy. Fitch lowered its GDP call for 2022 to 2.9% from a previous forecast of 3.5%, and trimmed its 2023 forecast to 1.5% from 1.6%.

“The default rate could rise to 2% or more in 2024, as a challenging economic backdrop is likely to drive downward rating migration,” said Eric Rosenthal, senior director at Fitch, in a release. “Defaults will take time to materialize as high inflation and slower economic growth adversely affects revenue and margins of speculative-grade issuers that extended maturities and boosted liquidity during the pandemic.”

The firm’s default forecast for 2022 remains unchanged at 1%, “as there are only a handful of issuers at risk of defaulting over the remainder of the year,” Fitch said.

The default rate so far this year is 0.6%, Fitch noted, following three defaults in May that totalled US$3.4 billion.

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