An Ordinary Downturn

In many ways the recent recession has been extraordinary. But in some ways it’s been commonplace.

One of those ways has been in the area of bond defaults. We’ve discussed before how Muni-geddon never happened. That is, the wave of 50-100 major municipal bankruptcies that would result in hundreds of billions in defaults wasn’t. And in the corporate world, defaults have trended down as well.

In 2011, 53 global corporate issuers defaulted, down from 81 defaults in 2010 and 265 in 2009. Only one of last year’s defaulters started the year rated investment grade—MF Global. And of the 53 defaults, 47 were issued either with junk ratings or as unrated bonds. When all bonds are considered, the global default rate declined to 0.75% last year from 1.15% in 2010.

What marks this year’s recovery is its ordinariness. In 2009 the global default rate peaked at 4.06%. That was only modestly higher from the prior peak in 2002 of 3.54%. Prior to the dot-com crash, the downturn of 1991 saw an overall default rate of 3.27%. While these are all significantly higher than the 30-year average of about 1.2%, it’s not surprising that the peak should be some three times the average during the depths of recession. Because of record profits and exceptionally low interest rates, default rates are now well-below average.

Default and bankruptcy are lagging indicators, and what they are showing us is that the recovery that began in 2009 has continued to move forward. Default risk continues to decline in the bond market. Interest rate risk, on the other hand, may start to become an issue soon.

Douglas R. Tengdin, CFA
Chief Investment Officer
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