Bad news: Bond defaults are on the rise

The default rate for high-yield bonds has risen to the highest level in six years, and a top bond analyst sees more bad news ahead for investors in so-called junk bonds.

According to S&P's fixed income research team, 3.8 percent of companies with "speculative-grade" debt have defaulted over the past 12 months through March, which is the highest that rate has been since 2010. This as 12 companies with poor credit ratings (hence their "speculative" nature as well as their high yields) defaulted in March.

Defaults are only likely to increase over the rest of the year, predicts Diane Vazza, S&P's head of global fixed income research.

Vazza says the 12-month rate will rise to 3.9 percent by December in a base case scenario. And in what Vazza calls a "pessimistic," but plausible, chain of events, the default rate could rise to 5.2 percent. That would correspond to 70 U.S. defaults during 2016.

To be sure, default rates have looked far worse in the past. Speculative-grade defaults rose above 10 percent in the wake of the tech bubble, and speedily surged to 12 percent in the credit crisis.

Default rates "are historically low ... but we are seeing some softness," Vazza said Monday on CNBC's "Trading Nation."

It's probably no great surprise that plunging commodity prices have a lot to do with rising defaults. Of the 36 speculative-grade defaults in the past year, half are "commodities-related" according to Vazza, because those companies operate in the energy space or are metals and mining names.

Meanwhile, in the month of March, S&P downgraded its credit ratings on 2 ½ companies for each company it saw fit to upgrade.

So how are yield-seeking investors reacting to all this bad news? Actually, one might say the market is taking it well.

The spread on speculative-grade debt, which compares the yield on speculative-grade bonds to the yield on bonds without default risk, actually fell from 8.68 percent to 7.64 percent during March, according to S&P.

Put simply, that means that even as more companies are viewed as candidates for defaults, and as the number of actual defaults has gone up, bond investors being paid even less to take on that risk.

Or, even more simply: Caveat emptor.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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