Defaults Set to Rise?

November 01, 2013 | Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner

As shown in the graph above, 2013 has been a tremendous year for both investment grade and below-investment grade companies to issue debt. Given the near-record low levels of both interest rates and credit spreads, the amount of issuance has not been surprising. However, one of these very metrics which has driven this supply serves as a key risk metric to watch in the coming year: credit spreads. Over the last 18 months, the option adjusted spreads (“OAS”) for investment grade debt rated AA, A, and BBB has fallen; the decline in the OAS for high yield is even more remarkable.

Certainly, these declines have benefitted credit investors, but their current low levels coupled with low default rates hints that there is only one direction for defaults and subsequent credit spread levels to go: up. While we have not yet seen alarm bells ringing for either of these items, they bear watching over the coming year.

Greg Leonberger, FSA, EA, MAAA, FCA
Director of Research, Managing Partner

Get to Know Greg

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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