Goldman Sachs: the default rate is bound to continue to rise, and the worst time for junk bonds is yet to come

June 13, 2020

Goldman Sachs said that with more defaults, high-yield bonds could have a worse time. Analysts Lotfi karoui said in a recent report that the Federal Reserve has used unprecedented means to inject liquidity into the financial system hit by the new crown epidemic, but this also means that investment grade bond spreads may have peaked. Nevertheless, high-yield debt still faces many disadvantages.

“Despite strong policy support, corporate borrowers still face huge cyclical challenges.” “As has been the case in the past downturn, financial distress will continue to intensify, leading to higher default rates and downgrades,” karoui said

Credit has been at the center of the ongoing turmoil in financial markets caused by the worsening epidemic. With unprecedented closures and travel bans, many businesses are trying to create cash buffers. This in turn has led to a surge in financing costs. In the first quarter of this year, the average spread of highly rated US dollar bonds jumped 179 basis points, the largest quarterly increase in the Bloomberg Barclays index since 1989.

Karoui expects the 12-month mobile default rate to rise to 13% in 2020. In addition to the $149bn of bonds that have been downgraded so far this year, he expects about $555bn worth of bonds to be downgraded to high-yield bonds in the next six months.

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