The Big Picture THE BIG PICTURE: CORPORATE BOND DEFAULTS: HARD TIMES AHEAD?


CORPORATE BOND YIELDS 300


250


200


150


100


50


0


02.01. 2019


02.02. 2019


02.03. 2019


02.04. 2019


02.05. 2019


02.06. 2019


02.07. 2019


02.08. 2019


02.09. 2019


02.10. 2019


02.11. 2019


02.12. 2019


02.01. 2020


02.02. 2020


02.03. 2020


02.04. 2020


02.05. 2020


02.06. 2020


Investment Grade spread (basis points)


Investment Grade issuance


(in bn USD)


Source: IMF/SIFMA


Are corporate bonds backed by the US Federal Reserve a safe haven? Default data suggests otherwise, writes Mona Dohle.


With stock markets turning sour at the beginning of the year, bonds have so far been the weapon of choice for many institu- tional investors.


Owning whatever the US Federal Reserve wants to buy has be- come a popular approach to sourcing what are presumed to be risk-free assets. But that adage has become a lot more complex to follow. When corporate bond spreads started to widen in March and rating agencies predicted a 10% default rate by the end of the year, the US central bank committed to buying investment grade corporate bonds in an attempt to trump 2008 interven- tion levels. Fast forward three months and the central bank has started to scoop up not just investment-grade debt, but also so called


12 | portfolio institutional July 2020 | issue 94


“fallen angels”, companies that had an investment-grade rating in March but have since slipped below the BB+ threshold. The level of intervention has so far been limited. By the end of May, the bank had bought some $3bn (£2.4bn) in corporate debt ETFs, reflecting only a fraction of the nearly $10trn (£8trn) in outstanding corporate debt for the US market. Nevertheless, the intervention soothed market tensions in the short run as yield spreads returned to more stable levels. But have risks been eliminated? Not according to the IMF, which warns in its latest Global Financial Stability Report that despite low yields, corporate defaults globally nearly doubled by the end of June, with the US accounting for two thirds of all bankruptcies. Indeed, S&P Ratings has now set out a base case scenario of a 12.5% default rate for US high-yield debt in March 2021, which could rise to 15.5% in the event of a second wave of Covid-19, despite the bond buying programmes.


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