Yesterday, Bloomberg published an article arguing that the current credit risk is low because the default rate is low,
Insulated by cheap money from the QE era and bolstered by cash on
their balance sheets, it remains rare for companies in Europe and the
U.S. to miss debt payments. Among higher-risk speculative-grade firms
the default rate fell to 2.9 percent last quarter, and may drop further
to 2.1 percent by year-end, according to Moody’s Investors Service. And
only one investment-grade firm has defaulted since 2012, data from
Standard & Poor’s Global Ratings show.
“Default rates are on the floor,” said Fraser Lundie, co-head of
credit at Hermes Investment Management. “Fundamentals still broadly
stack up.” Read more
However, note that the default rate they talked about is historical
default rate. It does not predict future defaults. In fact, historical
default rate to future probability of default is what historical
volatility to implied volatility. Just because the recent historical
volatility is low it does not mean that the volatility risk is low. This
applies to the credit market too.
But default rates aren’t the only thing credit investors care
about. Spreads have widened to levels not seen for more than a year as
concerns grow of overheating in the U.S. market, trade disputes, rising
rates, inflation and the end of the European Central Bank’s bond-buying
program.
… The credit market may also be downplaying the potential impact
of tariffs, analysts at UBS Group AG wrote in a July 24 report. They say
investors should be cautious about sectors including tech, industrials,
metals and mining. Higher corporate leverage may also lead to an
increase in stress among non-cyclical industries such as consumer
staples and healthcare, the analysts including Bhanu Baweja wrote.
…The end of loose monetary policies may also boost defaults in
emerging markets next year, according to Abdul Kadir Hussain, the head
of fixed income at Arqaam Capital, a Dubai-based investment bank.
ByMarketNews
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