8 March 2017 by Mark Holman
It’s been a while since we commented on this, but as spread levels in European high yield converge on the post-global financial crisis lows that we hit in Q2 2014, we need to be confident that the default rate is continuing to be well anchored.
Here in Europe, the 12 month trailing default rate remains stable and importantly, at a very low level, with the February data showing it stationary at just 1.9% . Europe of course has virtually no exposure to the commodity, metals and mining sectors, where most of the pain has been felt.
In the US, where just 12 months ago there was a reasonable degree of panic in the market, the same default rate dropped to 7.1% from 7.5%; all of this can be attributed to the commodities sector where the default rate dropped by a full 300bps to 20.3%. This can be expected to drop further in coming months, which should trigger additional improvements in the overall rate. Importantly, the underlying rate in the US, when you strip out the commodity, metals and mining sectors, also remains relatively low and stable at just 3.3%.
With broadly positive economic data from both sides of the Atlantic, and still accommodating monetary policies – as well as President Trump extending the US economic cycle further, we are of the view that the tightening in high yield spreads is justified and we are likely to make new lows in spreads, before the cycle ends.
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