Chart of Yields on CCC rated bonds at the lowest since 2014.

An interesting Tweet from Bloomberg’s Lisa Abramowicz shows that CCC bonds yields have fallen to their lowest level since 2014. It is interesting that these record low yields are happening as the level defaults are rising due to the impact of the pandemic.

S&P noted in October expect that the COVID-19 shock will double company default rates across the US and Europe over the next 9 months.

If it takes longer than expected to bring the pandemic under control or more lockdowns are needed, then U.S. default rates could hit 15% and 11.5% in Europe. The optimistic scenario is for a 4% U.S. rate and a 3% rate in Europe.

The previous record highs were 12.5% and 12% in the United States seen during the Asian financial crisis in 1997 and then after the global financial crisis just over a decade ago.

Source: https://twitter.com/lcdnews/status/1331241166533226498/photo/1

In November, S&P stated that the U.S. high yield default rate could hit 9% in September 2021 (from 6.3% in September 2020).

Overall it is a definite concern that the flows of cash into high-yield bonds and loans are pushing their yield to record lows at a time when defaults are actually rising. Indeed the expectation is that they will rise significantly further during 2021! Finance theory states that higher risk means a higher reward is needed to compensate for this risk, the opposite of what is currently happening. The question is when will the status quo reinstate itself?