Making Sense of High Yield Default Rates
Determining whether high yield bonds are a good opportunity can be a difficult proposition even with a sound method and quality data. If any inputs are faulty, excess return estimates can be useless at best and misleading at worst.
Default and recovery rates, which together constitute expected default losses, can have a material impact on investors’ expectation of high yield excess returns. Given the sudden economic contraction due to COVID-19, an assessment of defaults has become even more important as businesses face challenges adjusting their balance sheets and operating activities in the new regime.