The default rates on high yield bonds are at 1.6% currently, and many are claiming that the credit quality of debt is bad right now. This just cant be the case, the 1.6% default rate is at it’s lowest level in almost a decade. Where is this discrepancy, default rates should be higher?
The explanation lies somewhere between subjective credit rating and the ratings agencies themselves. These agencies serve themselves best where there are many junk-rated companies.
Then you look at the Enron effect, now agencies preemptively react against this type of occurrence by downgrading often. ■
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