Chart Of The Week: High Yield Defaults On The Rise
Alhambra Investment Partners, LLC | Apr 24, 2016 05:12AM ET
This week’s chart comes courtesy of a post from our friends at FT Alphaville. The chart is from BAML and tracks the number of high yield defaults.
Default rates are actually just about normal at around 5% but the number of defaults shown in this charts is consistent with recessionary conditions in the past. The reason for that, obviously, is that the number of high yield issuers has expanded enormously. As the Alphaville post points out:
It is worth noting though that “the reason that default rates are still below the historical average is that the number of US HY issuers has almost doubled over the 16-year period, from just over 600 in [Q1 2000] to close to 1,100 today.”
So what’s more important? The level or the rate? I’m not sure we know the answer to that yet but there are some interesting angles. For instance, is the rise in junk issuers a matter of all corporate issuers getting downgraded? In other words, is the rate low because a lot of formerly investment grade issuers are now junk? If that is the case, then the level might be more important. Or is it that a lot more companies now have access to the junk bond market who previously were either unable to borrow or depended on banks? If that’s the case, then the rate might be more important.
Unfortunately, the former appears to be the reality:
We’ve seen a deterioration in corporate balance sheets over the years and especially recently as companies have issued debt to buy back stock.
The rise in junk defaults is still at this point primarily an energy story and as oil prices have recovered from the lows so has the junk bond market. Inflows to the junk bond ETFs over the last month have been setting records as investors bet the worst is over. That could be true I suppose but it is likely dependent to some degree on the price of oil continuing its recent rise. And that is likely a function, at least partially, of the direction of the dollar. So to some degree buying junk bonds right now is a bet that the dollar will continue to weaken and oil prices rise. One does wonder though at what point higher oil prices are such an economic headwind that they start to affect other parts of the junk bond market.
Get The News You Want
Part of our investment process is to track credit spreads and they have narrowed recently and junk bonds and stocks have risen together. But the economic data has not improved, the economy tracking at a sub-1% growth rate in the first quarter. Higher oil prices are probably not going to make that better. Junk bond buyer beware.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.