The high-yield default rate is expected to accelerate around the beginning of the second quarter this year after bottoming out. The global speculative-grade default rate fell to 2.2% at the end of December, is expected to drop to 1.8% near the start of the second quarter and bounce back to 2.7% by year-end, according to Moody's Investors Service. "The traditional nine-month lag between [Federal Reserve] action and the bite on credit risk premium is on track for default rates and credit risk to bottom out somewhere around the second quarter," explained Christopher Garman, head of high-yield strategy at Merrill Lynch in New York.
While companies in most sectors are fairly well-funded and it is unlikely default and credit risk will skyrocket, sectors reliant on consumer spending are likely to feel the economic slowdown, added Garman. "The corporate sector looks healthy but the consumer is overstretched," he noted, declining to be more specific about which areas will be hit hardest. Garman noted there are indications a flight-to-quality might be underway as higher-quality sectors appear more attractive on a risk-reward basis.