Tread carefully
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Defaults on high-yield bonds rose last month, and Fitch Ratings says that’s expected to continue in the year ahead as conditions tighten.

In a new report, the rating agency said the trailing 12-month default rate rose by 20 basis points in March to 1.8% in the wake of the failure of Silicon Valley Bank.

The high-yield default rate in March surpassed Fitch’s forecast and is expected to continue growing over the rest of the year to reach its forecast range of 3.0%-3.5% for 2023.

“Our default forecast for 2023 is up sharply from the 0.5% and 1.3% rates registered in 2021 and 2022, respectively, but still below the 3.6% historical average,” it said.

However, the default rate may surpass that average in the year ahead, as financial conditions tighten and economic pressures mount.

“We expect further upward pressure on the [high-yield] default rate in 2024 from intensifying macroeconomic headwinds,” Fitch said.

The agency’s projected 2024 high-yield bond default rate range is between 3.0%-4.0%, or 25 bps higher than its 2023 projection.

The value of bonds on Fitch’s “overall market concern” list was up by 52% year-over-year in March to US$199.1 billion, it also reported.

And the value of bonds seen at risk of defaulting in the next two years is up to US$50.6 billion, a sharp increase from US$18.5 billion a year ago to its highest level since the onset of the pandemic.

By sector, companies in health care account for 34% of the bonds at risk, followed by retail at 16% and telecoms at 13%.