Defaults and Returns on High Yield Bonds: First Quarter 2004

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Abstract
The first quarter 2004 default rate for U.S. (and Canada) dollar-denominated high yield bonds was 0.41% based on $3.6 billion of defaults. This rate was just slightly higher than the fourth quarter 2003's very low rate of 0.36%. The latter was the lowest quarterly rate since the third quarter of 1998. The four-quarter rate as of March 31, 2004 continued its downward trend to 4.02% from 4.66% as of year-end 2003. There has only been one fallen angel default issue from a single company so far in 2004 compared to a total of 24 issues from 15 companies for all of 2003. New issues totaled a robust $43.8 billion, somewhat lower than the average quarterly figure for 2003 (which was almost a record high year). Returns on high yield bonds in the first quarter were 1.81% with a spread of -2.80% compared to ten-year Treasuries, which return 4.61%. The distressed ratio on high yield bonds increased slightly to 6.6%, up from 5.7% as of year-end 2004. In addition, the yield spread on high yield bonds increased by 43 bp over the past three months. While the increase in both the distress ratio and the high yield bond spread were minor, they indicate a market sentiment that is growing slightly more concerned about default risk.

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