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S&P: US speculative-grade default rate may top 10% between 2020-2022

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S&P: US speculative-grade default rate may top 10% between 2020-2022

The U.S. speculative-grade corporate default rate is expected to rise to 3.4% by June 2020, and could hit or top 10% between August 2020 and May 2022 amid growing risks observed recently, S&P Global Ratings said.

An inverted yield curve, which is seen as a precursor to recessions, preceded the last three peak default cycles over the last three decades when the corporate default rates surged above 10%. The yield curve is the difference between the yields on 10-year and three-month Treasurys.

However, the time between an inversion and a double-digit default rate varied from 15 months to three years, suggesting an average lead time across all three prior peak default cycles of 24 months.

This shows that the default rate could hit 10% as early as August 2020 or as late as May 2022, given the yield curve has inverted at the close of every day except one since May 23 through Sept. 16 this year, S&P Global Ratings wrote.

Meanwhile, credit risk has increased over the last few years as nearly 28% of speculative-grade issuers had a rating of B- or lower by the end of the second quarter — a level that was last observed in the first quarter of 2009. In addition, the ratio of first-time issuers rated B- and lower to total speculative-grade new issuers has reached a record high in recent years.

Consumer services and leisure sectors are expected to continue to have the most number of defaults in the next down cycle, S&P Global Ratings said.

The expected surge in the U.S. speculative-grade corporate default rate could be tempered by strong economic growth, low corporate taxes and space for more monetary stimulus, according to S&P Global Ratings.