According to Fitch, the high yield default rate went from 13.7% with 151 defaulters last year, to a forecasted 1% default rate for this year.His theory why:
My theory is interest expenses have taken such a dramatic cliff-dive it has only served to help high yield companies in managing interest costs and as a result their weighted average cost of capital.In other words, low interest rates are allowing zombie corporations to stick around (i.e. their business models may be dead, the economic environment may be dead, but low financing costs allow them to remain "alive"). But why would someone invest in a company that just a living dead entity. Bloomberg details:
“High yield is the place to be,” said Manny Labrinos, a money manager at Nuveen Investment Management who oversees $1.8 billion of fixed-income assets. “Sub-par growth is somewhat of a Goldilocks scenario because it means rates stay low and people are still going to reach for yield.”Investors are willing to take the risk due to the perceived relative value of high yield issuers. The below shows the yield to worst "YTW" of the high yield index vs. the five year treasury yield (the durations of the two are similar, thus the comparison).
This second chart is the ratio between the two. What it shows is the years to yield "YTY" (this type of metric is typically used to value muni bonds) to see how many years of treasury interest high yield bonds are currently yielding (or the more simple explanation, the ratio between the two).
With a yield to worst of 9% vs. just 1.9% for a 5 year treasury bond (or 4.8x more than similar duration Treasuries) we can see the appeal of the investment, but can they remain "alive".
Source: Barclays Capital