September 15, 2017

THE LIVIN' IS EASY:

A positive sign from the bond market : A falling trend in defaults will make investors more optimistic (Buttonwood, Sep 15th 2017, The Economist)

The global default rate on speculative (junk) bonds has been dropping; fewer companies are going bust (see chart). 

This is the first time the default rate has dropped below 3% since October 2015 when a sudden fall in the oil price caused cashflow problems for the energy sector, particularly in the US. Moody's, a rating agency, thinks the trend will continue, with defaults falling to 2.6% by the end of the year and 2.3% in 12 months' time.

The spread (or excess interest rate) paid by speculative borrowers has dropped back after a spike in 2015. Spreads are not as low as they were in 2007 (the height of the credit boom). But given that government bond yields are very low, the total cost of borrowing in nominal terms is extremely subdued by historical standards. That has made it easier and cheaper for companies to refinance themselves, and thus makes a short-term spike in defaults less likely. 

Posted by at September 15, 2017 1:48 PM

  

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