Stress in oil sector causes us corporate default rate to climb

S&P Global Fixed Income Research expects the US corporate trailing-12-month speculative-grade default rate to increase to 5.6% by June 2017, from 4.3% in June 2016 and 2% in June 2015.

Continued stress from the sustained decline in oil prices will likely remain a driver of defaults, though offsetting that slightly is the increased likelihood of the Federal Reserve delaying any interest rate hikes in the coming quarters. This should help keep borrowing costs subdued for most corporate borrowers in the United States as investors’ search for yield guides them toward speculative-grade bonds, says S&P.

Additional stress in Europe following the June 23 Brexit vote will likely also have a modestly positive impact on US borrowers, as they may be seen as less risky than their European peers.

However, this benefit may be limited to secondary markets – yields on new issuance have seen less of a decline since the vote.

Under a best-case scenario, S&P forecasts the default rate will remain at 4.3% through June 2017. In their worst-case scenario, S&P expects the default rate will rise to 7.1%.

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