MW: A default wave is building, says Deutsche Bank. Here's how bad it may get.

Dictionary definition of the word Fear.

MARKETWATCH reports:

May is coming to an end with the Nasdaq Composite potentially registering a 6% gain, while the Russell 2000 possibly ends with a small loss, emblematic of a year in which the tech index has surged 24% while the small caps have skidded 9%. Given AI mania propelling the techs, and the credit crunch after the regional bank crisis, that split could certainly continue.

But let’s take a look at the world of corporate credit, where the SPDR Bloomberg High Yield Bond ETF (JNK) has an average yield to maturity of 8.92%, and the SPDR Blackstone Senior Loan ETF (SRLN) has an SEC 30-day yield of 8.51%.

Deutsche Bank strategists Jim Reid and Steve Caprio just wrote the bank’s annual default study, now in its 25th year. Last year’s, correctly, called for the end of the ultra-low default era, though the current numbers are certainly not terrible. The U.S. high-yield bond default rate through April rose to 2.1% from 1.1%, and U.S. loan default rates rose to 3.1% from 1.4%. Over in Europe, speculative-grade default rates rose to 2.7% from 1.7%. According to Fitch, the average U.S. high-yield default rate is 3.6%.

But, the Deutsche Bank team say, “a default wave is imminent.” By the fourth quarter of 2024, they say the U.S. high-yield default rate will peak at 9%, and the U.S. loan default rate will reach 11.3%. The European speculative-default rate will rise too, though to a less steep 5.8%…

To read the full post, please click here.