Real Interest Rates and the Default Rate on High-Yield Bonds

Journal of Fixed Income, Fall 1997

Posted: 11 Apr 1998

See all articles by Martin S. Fridson

Martin S. Fridson

Lehmann, Livian, Fridson Advisors LLC

Christopher Garman

Merrill Lynch & Co.

Sheng Wu

Merrill Lynch & Co.

Abstract

Determinants of the aggregate default rate on high-yield bonds have been of interest at least since 1990 - 1991, when the proportion of defaulting issued reached effectively its highest level since the Great Depression. With recovery by the mid-19902, and a new record volume of issuance in 1993, analysts have wondered whether another wave of financial failures will follow. This research shows that nominal interest rates are not highly correlated with aggregate default rates on high-yield bonds. Real rates, however, significantly enhance analysts' ability to explain default rates. The effect is lagged by two years' meaning that investors can estimate future credit experience fairly accurately without having unique insights into the direction of the economy or financial markets.

JEL Classification: G32, G33

Suggested Citation

Fridson, Martin S. and Garman, Christopher and Wu, Sheng, Real Interest Rates and the Default Rate on High-Yield Bonds. Journal of Fixed Income, Fall 1997. Available at SSRN: https://ssrn.com/abstract=52516

Martin S. Fridson (Contact Author)

Lehmann, Livian, Fridson Advisors LLC ( email )

136 E 57th Street
Suite 501
New York, NY 10022
United States

Christopher Garman

Merrill Lynch & Co.

World Financial Center - North Tower
19th Floor
New York, NY 10281-1319
United States

Sheng Wu

Merrill Lynch & Co.

World Financial Center - North Tower
19th Floor
New York, NY 10281-1319
United States

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