Junk Bond Default Rate Lowest Since 2008

By Michael Aneiro, Barron's

The default rate among non-investment grade (junk)-rated U.S. companies keeps shrinking to ever-more negligible levels, and it fell to 1.7% at the end of the first quarter, its lowest level since February 2008, Moody’s Investors Service said today. That ultra-low default rate is what’s underpinning investor confidence in a junk-bond market that yields just 5.2% on average these days, when prior to 2012 its average yield had never dropped below 6.5%.

Moody’s forecasts that the default rate will rise to 2.4% by the end of the year and 2.7% a year from now, still well below the historical average of 4.5% since 1993.

Moody’s said capital markets “continue to be open for low-rated companies, supporting a low default rate.” Thanks to the Fed rates have been so low over the past five years that all but the junkiest of junk-rated companies has been able to refinance old debt by issuing newer bonds, extending maturities and lowering borrowing costs.

Taking the latest temperature of the junk-bond market: it’s gained 3.33% already in 2014 and trades at an average price of 104.6 cents on the dollar with an average spread of 376 basis points over Treasuries, per a benchmark Bank of America Merrill Lynch index.

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