Downward pressure appears to be building on high-yield default rates for the first quarter of next year, according to strategists who expect the cyclical low to occur in the coming months before defaults start creeping up again. The full impact of economic stimuli should push default rates to touch a low of around 2.3% in April or May of next year, predicted David Hamilton, director of corporate default research for Moody's Investors Service in New York. "We don't expect it to shoot back up, but it will reach its cyclical low," Hamilton said. The global default rate for high-yield issuers is currently at 2.9% and the U.S. default rate is at 3.4%.
Christopher Garman, head of high-yield strategy at Merrill Lynch in New York, expects pressures on default rates to start building in the first quarter of next year. Garman highlighted the increasing distressed ratio as indicative of the inevitable rise in default rates after they reach their low next spring. "The distressed ratio has ticked up to 6.3%, from 5.4% in July, 5.3% in June and its cyclical low of 4.9% in January," he stated, noting historical evidence also points to higher default rates ahead. "Casting an eye back, in the wake of [U.S. Federal Reserve] tightening, default rates accelerated from 1.7% in 1994 to 3.3% in 1995," Garman said, implying the historical trend should repeat itself after this round of Fed rate hikes.
