The global corporate speculative-grade bond default rate slumped to 1.69% at the end of August from 2.16% in July, according to a report by Standard & Poor’s Ratings Services.

The global speculative-grade default rate has remained below the long-term (1981-2003) average of 5.27% for 10 consecutive months. Expectations for continued economic strength, relatively favorable financing conditions, and healthy corporate profitability imply a sanguine outlook for defaults in the near term, with the global default rate continuing to drift lower in 2004.

In the U.S., results from a proprietary default forecast model indicate that U.S. speculative-grade default rates will rise slightly from their second-quarter low but the average forecast for the next four quarters (3.6%) will remain lower than the average of the last four quarters. Concerns for a more material increase in defaults in two to three years remain.

“In the U.S. and — to a lesser extent — in Europe, a rising proportion of lower-grade issuance beginning in 2003 serves as an early warning of renewed default pressure two to three years ahead,” explained Diane Vazza, head of S&P’s Global fixed income research.

In 2004, the proportion of lower-grade issuance in the U.S. remains high, recording 40.4% on average in the first eight months. The pace of lower-grade issuance decelerated slightly in the second quarter relative to the first-quarter average, and the third quarter looks to be in line with the second quarter. For full-year 2003, the proportion was 31%.

Even though interest rates will increase further in the coming months and put some pressure on spreads, issuance conditions are still expected to remain favorable because borrowing costs will remain low in historical terms. At 43.9%, the proportion of lower-grade issuance was also high in Europe in the first eight months, but the small size of the high-yield market in Europe accentuates volatility and limits direct comparison with the U.S.