S&P warns of possible trebling of U.S., European default rates

BY Reuters | CORPORATE | 12/01/22 11:52 AM EST

LONDON (Reuters) - Credit rating firm S&P Global has warned that speculative-grade U.S. and European corporate default rates are likely to double and might even treble next year as rising borrowing costs take their toll.

The firm estimated that the "trailing-12-month default rates" in the U.S. and Europe would reach 3.75% and 3.25% respectively by September, more than double the 1.6% and 1.4% in September 2022.

With so much depending on the length, breadth and depth of a potential global economic downturn, however, S&P added that "pessimistic forecasts for default rates of 6.0% and 5.5% aren't out of the question".

"We expect credit ratings to deteriorate, as credit fundamentals - for many corporates and some sovereigns - erode further", S&P's 2023 outlook report said.

(Reporting by Marc Jones; editing by Danilo Masoni)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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