The number of corporate bond defaults continued to drop in the past 12 months, but the total size of debt affected by default rose sharply, Moody’s Investors Service reported today.

Moody’s noted that the issuer-based global speculative-grade corporate bond default rate finished the first quarter 2006 at 1.7%, down from 1.9% at the end of the fourth quarter 2005; however, the dollar volume-based global speculative-grade default rate increased to 4.2% in the first quarter 2006 from 3.8% in the fourth quarter 2005.

“The divergence of the issuers-based and dollar-volume based default rates portrays two very different views of current aggregate credit quality,” said David Hamilton, director of Corporate Default Research. The first quarter’s issuers-based default rate — well below its average 5.1% annual rate — suggests the best corporate credit quality in almost 10 years. The current 4.2% dollar volume default rate, on the other hand, is much nearer its 5.2% annual average rate, and is up from 3.8% in the fourth quarter 2005.

The issuers-based default rate series has historically been less volatile than the dollar volume-based index, which can be swayed by a few defaults with high volumes of debt outstanding.

Moody’s forecasting model predicts that the issuers-based global speculative-grade default rate will gradually rise from its current 1.7% level to 3% by the end of the first quarter 2007.

“The factors that Moody’s uses for forecast the default rate — credit rating changes, the slope of the treasury yield curve, and the seasoning pattern of new junk issues — suggest a neutral to slightly negative bias,” added Hamilton. Despite the expected increase, Moody’s expects the default rate to remain below average for the foreseeable future.

Default counts and volume both dropped significantly in the first quarter of 2006 compared to the fourth quarter of 2005, Moody’s said. In the first quarter 2006, only three corporate issuers defaulted on a total of $1.9 billion bonds. In the fourth quarter of 2005, 10 issuers defaulted on a total of $11.8 billion of bonds.

U.S.-based issuers accounted for all defaults in first quarter 2006. The U.S. speculative-grade default rate ended the first quarter at 2.3%, slightly down from 2.4% in fourth quarter 2005. In first quarter 2005, the U.S. default rate was 2.8%, according to Moody’s.