COVID | Credit | Equities | US
With high yield credit spreads near 540bp, is high yield a buy? Moody’s default rate outlook suggests it is, and that it could tighten 100-150bp from current levels in coming quarters. The one catch is that this scenario implies the economy continues to make steady if unspectacular progress in recovering from the coronavirus shock.
Even though there are a variety of emerging risk factors that could keep market conditions volatile for now, we think high yield is a buy for investors with medium-term horizons.
Default Rates Are Declining
Moody’s recently revised its default projection downward and now forecasts that the 12-month trailing default rate will peak at 11.4% in February 2021. Previously, Moody’s called for a peak rate of 12.1% in February 2021. Moody’s official forecast is for the default rate to fall to 10.4% by May 2021 and 8.9% in August. Moody’s market-based indicators imply default rates falling to 6.6-7.4% in May and 6-6.6% in August.
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