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 (e).
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 Q4 2021, corporate debt was near 49% of nominal GDP, with speculative grade debt defaults at 2.6%. Speculative grade defaults were forecast at about 2.6% by the end of Q4 2022.
Sources: Bloomberg, Moody’s, and Wells Fargo Investment Institute. Quarterly data from January 1, 1986 to December 31, 2021. Q1 2022–Q4 2022 speculative grade default rate forecasts from Moody’s forecasts, as of March 31, 2022. The nonfinancial corporate debt data includes both High Yield (HY) and investment-grade (IG) corporate debt. GDP = gross domestic product.
- Issuance for both investment-grade and high-yield debt remained elevated through the fourth quarter of 2021.
- Default rates climbed during the height of the pandemic; however, they are now expected to remain subdued due to higher corporate profits and ample liquidity.
- While we may see some near-term volatility, a relatively low-rate environment should be a long-term positive for credit-related sectors, allowing many issuers to refinance in order to extend maturities and lower interest expense.