Corporate default rates are at their lowest levels in modern history

Ever since the financial crisis, companies have been either cutting back on debt or refinancing their debt at lower interest rates. And with interest rates low, credit markets liquid, and economies growing, corporate defaults have been very low.

Deutsche Bank’s Jim Reid discusses this trend in the firm’s latest Annual Default Study.

“[W]e can’t overstate how low overall defaults are,” Reid writes. “The 2010-2014 cohort is the lowest 5-year period for high yield (HY) defaults in modern history.”

Before most companies head for default, their investment grade bonds get downgraded to junk status, which is another way of saying they become categorized as high yield bonds.

“HY defaults (using Single-Bs as a proxy) have now spent 12 of the last 13 years below their long-term average,” Deutsche Bank’s Jim Reid writes. “The average for the last 12 years is now 1.5% (0.9% excluding 2009) against an average of 4.9% since 1983 (1983-2002 average 6.9%).”

Reid reminds us that these trends have been aided by ultra-easy monetary policies, which have kept rates low and bond markets very liquid.

“In recent years we’ve explained this phenomenally low default environment by discussing the increasingly artificial demand for fixed income which has allowed more borrowers to access capital markets at cheaper rates,” Reid said. “Although growth is currently low relative to history, funding costs are even lower relative to the past.”

Reid thinks default rates will stay low well into 2017. But there are some troubling signs that defaults, delinquencies, and outright bankruptcies are already on the rise.

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