Defaults and Returns on High-Yield Bonds

Abstract

The year 2002 was remarkably difficult on many fronts for most financial markets. For the high-yield bond market, it was again a year of record amounts of defaults ($97.9 billion), which contributed to low recovery rates and slightly negative absolute returns. The default rate registered a record 12.8%, based on $757 billion outstanding. Despite these record default totals and rates, the market's decline was orderly, with little panic, and the year actually ended with reduced defaults and highly positive returns in the fourth quarter—a harbinger of a broad-based comeback in the high—yield bond and defaulted debt markets in 2003.