Standard & Poor's forecasts defaults on 11percentt of high-yield debt in 2002, as struggling companies burn through their cash.
Whereas S.&P. is attempting to forecast actual defaults, I'm instead looking at the market's perceived risk of default as of today.
Moody's, a rating agency, recently raised its forecast of defaults on high-yield corporate bonds to 7.4% over the next 12 months.
On March 19th this was forecasting a default rate on high-yielding American corporate bonds of 8.55% by the end of February 2009, compared with Moody's forecast for American bonds of 6.8% for that date.Martin Fridson, the firm's founder, admits this forecast is risky, because it relies on prices set in a market that has been hit by the liquidity crisis.
One reason is that the rating agencies used both a mathematical model and the judgment of their in-house specialists when forecasting the default probabilities of corporate bonds; on subprime-related securities, they could only use mathematical models, not least because the instruments were so new.
Last month, S&P lowered its default forecast and pointed to low interest rates from the Federal Reserve, a growing economy and buoyant corporate credit markets as reasons to take a more optimistic view.
Moody's forecasts that the default rate will continue to fall even if the economy suffers a double-dip recession.
"The high-yield market is forecasting a 13percentt default rate, which has never occurred and is not going to happen," said James T. Swanson, a manager of bond portfolios at MFS Investment Management in Boston.
Credit Suisse First Boston's default forecasting model saw the default rate declining back to just over 3% during 2000, much less than the more pessimistic forecasts.
Donaldson's forecast is for falling default rates.
