Thomas Rentsch
Senior Portfolio Manager High Yield
Credit default rates in high yield are falling and is the market underestimating this development?
A current analysis by Moody’s shows: Credit losses in the Ba, B and Caa rating categories are declining over time. In addition to better rating quality and lower duration, stricter regulation, greater transparency, active central bank interventions and more efficient restructuring have structurally changed the market environment.
What does this mean for investors and how robust is high yield really?
Credit default rates in high yield fall
When talking about the advantages of high-yield bonds, one hears arguments such as the increased proportion of BB bonds or the reduced duration.
However, Moody’s annual evaluation of default rates contains another interesting data series that shows falling credit losses over time in the Ba, B and Caa high-yield rating categories, thus providing a strong argument for the increased attractiveness of this credit segment.
Annual credit default rates by rating
Source: Moody’s Annual default study, February 2025; credit default rate is the annual loss borne by investors as a combination of default rate and recovery rate
Increased regulation and transparency
With the expansion of regulatory requirements and improved transparency, the information basis for investors and analysts has fundamentally improved. Regulatory initiatives such as Basel II/III, stricter prospectus requirements and regular disclosure requirements have made it much easier for issuers and creditors to assess risks. The rating agencies analyze balance sheet quality, cash flow and management decisions more comprehensively than in the past. As a result, problematic issuers can be identified at an early stage, which leads to market participants reacting more quickly.
Influence of government and central bank interventions
A second important reason is the active role of governments and central banks in the economic cycle. Major recessions, which used to hit high yield particularly hard, are now cushioned by massive liquidity measures, corporate programs and bond purchases. Interest rate cuts and support measures prevent widespread waves of defaults following downturns. This can be seen impressively in the default statistics surrounding the crises of 2008 and 2020, where the rates fell again quickly despite economic shocks.
More efficient insolvency proceedings and out-of-court settlements
Last but not least, more efficient insolvency proceedings and the more frequent use of out-of-court settlements – such as “Amend & Extend” or distressed exchanges – have helped many issuers to overcome financial crises without having to file for formal insolvency. The ability to restructure existing debt or extend maturities enables companies and investors to limit losses and sustainably reduce default statistics.
Diversification of financing sources
In addition, companies no longer rely exclusively on bank loans or individual bond markets, but combine bonds, loans and private debt. This diversification reduces dependence on individual creditors and opens up alternative restructuring paths. This strengthens resilience – particularly in the high-yield segment – and helps to ensure that payment difficulties are less likely to result directly in defaults.
Significance for investors
High yield is more attractive to investors today than in the past: better ratings, falling default rates, stronger regulation, greater market transparency and low duration make the segment more robust. Nevertheless, active risk management remains essential and careful analysis and smart portfolio construction are still the key to sustainable investment success.
“When you talk about the advantages of high-yield bonds, you hear arguments such as the increased proportion of BB bonds or the reduced duration. However, that is no longer everything.”
– Thomas Rentsch
Risks
Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out.
Past performance is not an indication of future results, nor can future performance be guaranteed.
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