The default rate on U.S. high yield debt moved noticeably higher in the third quarter, reports Fitch Ratings.

Both the number of companies defaulting on their bond obligations and the par value of bonds affected by the defaults topped results for each of the previous two quarters. In all, 11 issuers defaulted on US$7.1 billion in bonds in the third quarter compared with a total of 11 issuers and US$2.8 billion in defaults for the entire first half of the year.

The trailing 12-month default rate ended September at 1.8%, up from 1.1% in June. In addition, through the third week of October, five issuers (among them Delphi Automotive) had defaulted on US$2.7 billion in bonds, pushing the trailing 12-month default rate further up to 2.1%, still quite low but above 2004’s year-end rate of 1.5%.

“While economic and funding conditions remain relatively robust, the uptick in defaults in the second half of this year is not surprising,” said Mariarosa Verde, managing director, Fitch Credit Market Research, in a release. “Distressed companies in weak sectors were sure to be hit by the additional burden of high energy costs in 2005, and at close to negligible levels, the default rate was generally running at an unsustainable cyclical low in the first part of the year.”

Despite recent headline defaults, however, the current default rate, at roughly 2%, remains in benign territory and is set to end the year at a level significantly below average (5.5% according to Fitch’s U.S. High Yield Default Index), the second consecutive year to produce such results.

Fitch notes that most economists continue to forecast GDP growth above 3% in 2006, which if realized should continue to support below-average default rates. It believes, however, that negative developments have surfaced in 2005 which despite the economic outlook will put upward pressure on the default rate over the next year.

“Rating activity for U.S. high yield issuers turned net negative once again in 2005 with par downgrades exceeding upgrades by a ratio of 1.4-to-1 year to date through September,” said Paul Mancuso, senior director at Fitch. “In contrast, high yield upgrades topped downgrades in 2004.”

Upgrades have been especially lackluster at the lowest rating levels, resulting in little improvement in the significant market concentration of such bonds – those most prone to default, it adds.