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Thomas Kenny

Low Default Rate Remains a Major Plus for High Yield Bonds

By February 14, 2014

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The good times continue to roll for high yield bond issuers. High yield bonds' performance tends to be driven by credit conditions (the ability of issuers to pay the interest and principal on their debt) rather than movements and prevailing interest rates. As such, the asset class has enjoyed an ideal environment in the past year. The combination of strong economic growth and rising corporate earnings has helped high yield issuers avoid default, as has the ability of many companies to refinance their existing debt at lower rates. These trends are reflected in the year-over-year high yield default rate of just 1.8% in January, which is well below the long-term average of just over 4%. The current level is consistent with the forecast put out in December by the rating agency Fitch, which called for a default rate in the range of 1.5% to 2.0% in 2014.

While the low historical yield spread of high yield bonds relative to Treasuries continues to cap the upside, as discussed here, the low default at least provides a measure of support for the market as long as the stock market is steady and investor risk appetites remain firm. This is reflected in the strong year-to-date return for high yield bonds. Through Thursday, February 13, the iShares High Yield Corporate Bond ETF (HYG) had posted a total return of 1.45%, while SPDR Barclays High Yield Bond ETF (JNK) had gained 1.29%.

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