The default rate on U.S. high-yield debt is starting to climb and is projected to rise toward its historical average over the coming year, says Fitch Ratings.
In a new report, the rating agency said the 12-month trailing default rate has risen to 1.5% for U.S. high-yield debt, the highest level since early in the pandemic.
Fitch said high-yield defaults are expected to reach the 3.0% – 3.5% mark by the end of year.
“Consumer-oriented sectors, such as retail and leisure/entertainment, could see more defaults this year as consumer pressure mounts,” it said.
These trends are already evident, the report suggested. In 2022, the retail sector’s default rate surged from 0.2% to 1.7%.
Fitch said the retail sector default rate could hit 12% by the end of the year, and that the broadcasting/media sector default rate is expected to finish the year at 10%.
“Fitch’s economics team expects consumer spending growth to slow in 2023, as the Fed’s aggressive tightening cycle increasingly weighs on job growth and consumer demand in 2023,” the report said.
“Additionally, we see some risk of the Fed adopting a more aggressive-than-expected interest rate policy, possibly in response to sustained wage pressures or a reversal in the disinflationary trends of recent months, which poses risks to consumer spending in 2023,” it added.
While the year-end forecast is in line with the 3.6% historical average for defaults, it represents a notable increase from the 0.5% rate recorded in 2021 and 1.3% in 2022.
Fitch is warning that the default rate may rise further in 2024. It is currently forecasting the rate will be between 3.0% and 4.0% next year.
“Positively, high yield market technical and sentiment are improving, which is benefiting near-term capital access and refinancing activity,” Fitch said.
Indeed, high-yield issuance reached US$18 billion in January on signs of declining inflation and slower rate tightening.