High-Yield Corporate Bonds: Default Rates Should Remain Stable, if Slightly Elevated, in 2024

This High-Yield Corporate Bonds sector report is excerpted from the First Quarter 2024 Fixed-Income Sector Views.

The evolving macroeconomic environment in 2023 led to elevated uncertainty, restricted lending, and C-suite anxiety. This climate forced companies that missed revenue or cash flow targets to restructure debt and slash costs, as soaring inflation eroded margins. The par-weighted default rate on the ICE BofA High Yield Index ended 2023 at 2.4 percent, up from a low level of just 1.5 percent in 2022. The fixed-rate nature of high-yield bond coupons and the relatively low amount of maturing bonds meant that there weren’t many interest or payment defaults. According to BofA research, defaults in the index were almost evenly split between bankruptcy and distressed exchange.

Many of the same credit themes that drove trends in 2023 are likely to carry into 2024, but some headwinds are fading. The dearth of maturities in 2024 should again help keep payment defaults to a minimum. In the high-yield index, over 50 percent of bonds by amount outstanding were issued in 2020 and 2021 when yields were very low, which has supported interest coverage ratios. Scheduled maturities are spread out over the next five years, with the peak as a share of outstanding happening in 2029. Sentiment is improving as financial conditions have eased substantially with the decline in rates since October, which should help issuers access capital markets at reasonable spreads if needed. High-yield corporate bond spreads tightened from 481 basis points to 339 basis points by year-end.

A more gradual credit deterioration story is likely to spread out over the next several years. Although we expect the Fed to start easing this year, we do not believe short-term interest rates will return to decade lows. This means that most borrowers will still need to adjust to a higher interest rate environment once their debt comes due or as borrowing needs arise. The slow-moving impact of this factor on the high-yield market can already be seen in the shifting credit profile of the index over the past couple of years. While the high-yield index remains mostly comprised of BB-rated bonds (47 percent of the index as of Dec. 31, 2023), that share has gradually fallen from almost 55 percent in mid-2021. In its place, single B-rated bonds have gained 6 percentage points to a 39 percent share.

Taking into account the combination of positive factors (recent easing in financial conditions, the index’s concentration in BB-ratings, the upcoming Fed easing cycle) against negative factors (the market’s continued adjustment to higher interest rates and the ongoing lagged impact of inflation on costs), we believe the default environment in 2024 will resemble 2023. We expect to see more downgrades than upgrades and a higher frequency of restructuring unsustainable leverage profiles. But the par-weighted default rate for the index will likely land again in the 2.5–3 percent range, which should be manageable for the high-yield market.

—By Thomas Hauser and Maria Giraldo

Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk, including the possible loss of principal. In general, the value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. During periods of declining rates, the interest rates on floating rate securities generally reset downward and their value is unlikely to rise to the same extent as comparable fixed rate securities. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors, LLC.

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