Rising expected default rates reflect weakening economy

Slowing global economy, combined with tightening financing conditions and input costs inflation will lead to higher expected credit default rates in 2023 and beyond. In our observations, market participants expect that defaults would peak at around 6 to 6.5% in 2023 for high yield bonds and just below 5% for leveraged loans.

As the chart suggests, 2023/24 period will likely face sharp increase in defaults. However, the default rate will reach nowhere near the levels experienced during the 2008/09 Great Financial Crisis. In comparison to the earlier temporary spike of defaults during the 2020/21 pandemic-period, we expect prolonged period of elevated default rates until financing conditions improve and inflationary pressures ease.

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