The global corporate speculative-grade bond default rate remains low, but a new report from Standard & Poor’s Ratings Services says that an increase in low-grade issuance suggests that the default rate for junk bonds could be headed higher.

The default rate rose to 1.71% at the end of July, but it remains very close to the eight-year low of 1.58% recorded in March, according to S&P. This is below the long-term (1981-2004) average of 4.91% for 20 consecutive months but is still higher than the record low of 1.28% posted in the second quarter of 1997.

“Expectations for economic stability, relatively favorable financing conditions, and healthy corporate profitability imply a sanguine outlook for defaults in the near term,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “The global default rate is expected to edge up slowly from its trough before the end of 2005.”

In the United States, results from a proprietary default forecast model indicate that U.S. speculative-grade default rates will continue to edge up slowly over the next few quarters, reaching 2.48% by the second quarter of 2006. The average forecast for the next four quarters (2.18%), however, remains about even with the historical average of the trailing four quarters (2.19%).

In the U.S. and, to a lesser extent, in Europe, a rising proportion of lower-grade issuance beginning in 2003 serves as an early warning of renewed default pressure within two years, S&P cautions.

In the first seven months of 2005, the proportion of lower-grade issuance in the U.S. remains high at 45% compared with 43% on average in 2004. For full-year 2003, the proportion was 31%.