Conducting a detailed credit analysis requires significant expertise and effort, but for credit investors assessing default risk is crucial.

Default risk is a very real consideration, even though default rates fluctuate over time.

This chart shows the historical default rates across corporate bonds from 1981 to 2023 with each line representing a different segment of the credit market.

The green line represents high yield or speculative grade default rates.

The dark blue line represents investment grade default rates, and the lighter blue line represents the total default rate across the entire corporate bond market.

As expected, high yield bonds, which carry a higher level of credit risk, show much more volatility and higher peaks in default rates compared to investment grade bonds.

Let's examine some of the peaks in this chart to understand how different economic events influenced default rates.

In 1990, there was a significant downturn in the US economy driven by rising oil prices following the Gulf War and higher interest rates.

This economic strain led to an increase in high yield default rates.

The early two thousands saw another spike during the dot-com bubble.

The collapse of many overvalued technology companies and the resulting economic impact led to an increase in default rates, particularly within the high yield sector.

2008 marks the most prominent peak on this chart during the global financial crisis.

This period of severe economic turmoil saw a widespread collapse of financial institutions and a surge in defaults across the credit spectrum.

But it was as with previous spikes, especially pronounced among high yield bonds.

In 2016, we see a smaller peak reflecting weak global economic growth and a sharp decline in oil prices.

Many energy companies, especially those in the shale oil sector, struggled to service their debt. During this period leading to an uptick in defaults within the high yield market.

2020 brought another substantial peak due to the COVID-19 pandemic.

The sudden and severe economic shock caused a rapid increase in defaults as companies across many sectors faced unprecedented financial strain.

Finally, in 2023, we see a slight rise in default rates, largely driven by higher interest rates as central banks tightened monetary policy to combat inflation.

These higher rates increased debt servicing costs, particularly impacting more leveraged companies in the high yield sector.