The slack pace of bond defaults globally sent corporate default rates to near record lows in February, Moody’s Investors Service reported today.

Moody’s global speculative-grade default rate fell to 1.6% in February from 1.8% in January, its lowest level since 1997. Following the global trend, Moody’s European speculative-grade default rate dropped to 0% in February.

“February’s 1.6% global default rate is one of the lowest on record in the modern era of leveraged finance,” noted David Hamilton, director of corporate default research. “The default rate has only been lower in 1997 and 1995, when it hit rock bottom at 1.4% and 1.2%, respectively. The last time the European default rate was zero was in 1998, when the original issue speculative-grade sector in Europe was really just emerging.”

Moody’s forecasting model for its issuer-weighted global speculative-grade default rate indicates that February’s default rate may represent a cyclical low, and that the pace of defaults will begin to accelerate. Moody’s expects that the global speculative-grade default rate will rise from its current 1.6% rate to 3.1% by the end of February 2007.

“The fundamental factors that Moody’s uses to predict the default rate — such as changes in the distribution of credit ratings, the seasoning pattern of new issuance, and the slope of the Treasury yield curve — have a neutral to slightly negative bias at the moment. Together with the extremely low current rate of default, it is reasonable to expect a gradual rise in the default rate,” added Hamilton.

While the pace of the number defaulters has slowed, the pace of total dollar volume of defaults has increased in recent months. Moody’s global speculative-grade dollar-volume weighted default rate fell slightly to 3.6% in February from 3.7% in January, but is up by about 55% from the 2.3% level of February 2005.

Default rates measured as a percentage of total dollar volume have historically been more volatile. While issuer-based default rates measure the likelihood of default, dollar volume based default rates measure the portfolio-weighted impact of defaults. “When the dollar volume default rate rises relative to the issuer-based rate — as it did in 2005 — defaults ‘feel more painful’ to investors than the issuer-based measure suggests,” Hamilton noted.

Among U.S. issuers, the speculative-grade default rate edged down to 2.2% in February from 2.4% in January. A year ago, the speculative-grade default rate stood at 3.1%.

Moody’s European speculative-grade default rate fell to 0% last month from 0.5% in January, indicating that no Moody’s-rated European corporate bond issuer defaulted during the last 12 months. The last Moody’s-rated European defaulters were Concordia Bus AB and Concordia Bus Nordic AB, both defaulting in February 2005. The European default rate was 1.8% in February 2005.

The dollar-volume default rate among U.S. issuers remained unchanged at 4.2% from January to February. A year ago, the rate was 2.4%. Among European issuers, the speculative-grade default rate fell to 0% last month from 0.2% in January.