“In the backdrop of the US downgrade we do not believe the downgrade itself is likely to drive up the default rate,” Diane Vazza, head of Standard & Poor’s Global Fixed Income Research, said.
However, she added, an increase in the default rate could result from a sustained deterioration of market fundamentals and stalled economic growth in the US.
Following the downgrade of the United States of America to ‘AA+’, Standard & Poor’s Global Fixed Income Research is taking a look at several market indicators, including bond spreads, issuance volume, and the corporate default rate.
In an article published on Monday, titled “Frequently Asked Questions: Assessing The Impact Of The U.S. Downgrade On Corporate Funding,” we address some of the frequently asked questions about how the rating action on the U.S. could affect these measures by providing a snapshot of credit market conditions immediately prior to and following the downgrade.
Standard & Poor’s Ratings Services placed its long- and short-term sovereign credit ratings on the U.S. on CreditWatch with negative implications on July 14. “Since then, credit spreads for both investment-grade and speculative-grade companies have risen sharply, by 17% and 29%, respectively,” said Diane Vazza.
On August 5th Standard & Poor’s lowered its long-term rating on the US to ‘AA+’. “In the next few days, the investment-grade spread increased from 176 bps to 199 bps on August 11,” said Ms. Vazza. “The spread surpassed its one-year moving average of 179 bps and its level of 177 bps, where it began the year. Meanwhile, the speculative-grade spread expanded to 708 bps on Aug. 11 from 609 bps on August 5th.”
In addition, speculative-grade issuance volumes have plummeted since July 14. In the first 10 days of August, companies did not issue any speculative-grade bonds that were rated by Standard & Poor’s.
“Overall market conditions have deteriorated over the past month, but the default rate is a lagging indicator, which means it usually rises following sustained periods of economic weakness. The impact of the current market stress may not lead to an appreciable increase in the default rate until after our current forecast horizon,” S&P added.