Line graph comparing corporate debt levels and high-yield default rates.
Left y-axis: Speculative grade default rate (%), 0% – 16%, right y-axis: Corporate debt as percent of nominal GDP (%), 36% – 61%; x-axis: 1986 – 2022.
The U.S. speculative grade default rate (LHS) begins near 4% and broadly follows the pattern of U.S. nonfinancial corporate business credit market liability as a percent of nominal GDP (RHS) from 1986 – 2012. Both have peaks in 1990 – 1991 (above 43% for corporate, above 12% for speculative grade), 2001 – 2002 (about 45% for corporate, near 11% for speculative grade), and in 2009 (above 45% for corporate and above 14% for speculative grade). Since 2012, however, corporate has risen to nearly 49% while speculative grade defaults have dropped to about 6.5%. Both corporate debt and speculative grade defaults spiked sharply in early 2020 (from near 46% to over 56% for corporate, from about 4.4% to nearly 6.5% for speculative grade). By the end of June 2022, corporate debt was near 50% of nominal GDP, with speculative grade debt defaults at about 1.4%. Speculative grade defaults were forecast at about 4.2% at the end of Q2 2023.
Sources: Bloomberg, Moody’s, and Wells Fargo Investment Institute. Quarterly data from January 1, 1986 to June 30, 2022. Q3 2022–Q2 2023 speculative grade default rate forecasts from Moody’s forecasts, as of September 30, 2022. The nonfinancial corporate debt data includes both High Yield (HY) and investment-grade (IG) corporate debt. GDP = gross domestic product.
- Ample liquidity has allowed many high-yield issuers to refinance , extend maturities, and lower interest expense.
- Looking ahead, we expect high-yield default rates to rise over the next 12 months as liquidity and financial conditions tighten.