Default rates edge lower in August

With only one distressed exchange in August and a year-to-date figure of 51 (vs. 65 LY), Moody’s High Yield default rate edged slightly lower to 2.8% from 2.9% in the prior month. HY default rates was stable in the US (at 3.4%) while it edged lower in Europe by 10bp (to 2.3%). Meanwhile, default-rate forecasts estimated by the rating agency have been revised downwards for early 2019 in the US (by 16bp in average, see chart opposite) as well as in Europe (17bp in average). Interestingly, the 1-year forward HY Moody’s default-rate is decreasing in the US (from 2.21% to 2.07%) while this is stable in Europe (at 2.14% for August 2019). Moody’s highlights in its report that even though default rate forecast is benign in the near term, storm clouds are gathering over the medium term on the back of i / less favorable rating distribution, ii/ tighter monetary policy in the US and iii/ trade war potentially dampening global growth in 2019. Given that €HY spreads widened by 10bp in August (€ Iboxx Non-Financials), slightly lower default-rate (see above) lead to (as of August 31 st ) higher spreads net of default-risk i.e 1.4% (vs. 1.2% the prior month). Our 6 month forward breakeven spread (with the level of spreads of 1 8 th of September and our default rate forecast coming from 50% US and 50% EU) now stands at 1.3% . Sector wise, Moody’s expects over the next 12 months the US HY default-rates to be highest in Media (even though the forecast was lowered by 64bp), followed by Retail and Durable Consumer Goods.