U.S. High-Yield Default Rates Double... Quality Matters

Seeking AlphaFinancial Advisor | Today's Market | Market OutlookU.S. High-Yield Default Rates Double... Quality MattersSep. 30, 2020 7:47 PM ET|| Includes: ACP, AIF, ANGL, ARDC, BSJS, CIF, CIK, DHY, DSU, EAD, FALN, FLHY, GGM, HIX, HYDB, HYG, HYLB, HYLD, HYLS, HYT, HYUP, HYXF, IVH, JNK, JQC, JSD, KIO, MCI, MPV, NHS, PCF, PHT, PTBD, SJB, SPHY, UJB, USHY, VLT, WFHYby: WisdomTreeWisdomTree Asset Management/ETF Provider, Currency, Global Equities, fixed incomeWisdom Tree Blog.cls-1{fill:#024999;}SummarySpread levels have been on a noticeable downward trajectory from their peak level on March 23.
HY spreads and default rates have an interesting relationship.
The WisdomTree U.S. High Yield Corporate Bond Fund is focusing solely on public issuers and eliminating those with negative cash flow.

While March seems like a long time ago (at least for me), the repercussions of perhaps the worst two-week period in the U.S. high-yield (HY) arena are now showing through some five to six months later. Interestingly, the news seems to have flown under the radar up to this point, but according to Moody's, speculative-grade default rates in the U.S. have been increasing at a rather swift pace through the summer months. Naturally, from a fixed income portfolio perspective, this development underscores our thesis that screening for quality within the HY sector remains of paramount importance.
Before I get into the default numbers, let's take a look at recent developments within the HY market. Spread levels have been on a noticeable downward trajectory from their peak level on March 23. At its "wide," the spread had spiked to 1,100 basis points (bps) (the second highest on record), representing an incredible 750 bps increase from about the President's Day holiday. Since then, the reading has narrowed by 580 bps, retracing about 77% of the aforementioned widening (see graph).
High-Yield Spread

Back to the default numbers. As I've written before, HY spreads and default... Read more