Fitch slashes default forecast for U.S. high yield

Amid improving economic and financial market conditions, Fitch Ratings has slashed its forecast for the U.S. high yield bond default rate.

The rating agency now expects the high yield default rate to come in at just 1% by the end of 2022.

This represents a drop from its previous forecast of a 2.5% to 3.5% default rate, and a plunge from the 15.6% rate recorded at the height of the pandemic in July 2020, and the 13.7% rate at the end of 2020.

Fitch said the revised forecast, which is the lowest since 2014, reflects the fact that most weaker issuers already defaulted in 2020, along with improved conditions due to higher oil prices and renewed capital market interest.

“The reduction reflects a sustained decline in our ‘market concern bonds’ total, a very low near-term maturity wall and our expectation that issuer fundamentals will continue to improve,” said Eric Rosenthal, senior director at Fitch, in a release.

“While uncertainty related to the pandemic persists due to the potential impact of coronavirus variants, capital market access remains strong,” he said.

The trailing 12-month default rate in September is currently 1.2%, and Fitch said that it could finish the month at 1%.

“There have been no defaults in the past six weeks, and the default rate is expected to finish this year at 1%, with the potential to challenge 2007’s 0.5% low,” it said.

Fitch noted that the forecast for 2022 indicates that the cumulative default rate for 2020–2022 would come in at just 7%, well below the 22% recorded during the 2008–2010 global financial crisis.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.