Defaults & Returns on High Yield Bonds: Analysis Through 1998 and Default Outlook for 1999-2001

46 Pages Posted: 5 Nov 2008

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Diane Cooke

affiliation not provided to SSRN

Vellore Kishore

New York University (NYU) - Department of Finance

Date Written: 1999

Abstract

Nineteen-ninety-eight was a mixed performance year for the high yield bond market in the United States , with much below average returns and spreads over default-risk-free Treasury Bonds but continued relatively low default rates and losses and another record year of new insurance. Returns and new insurance were excellent through the first seven months of the year but returns reversed and new issues dried up, temporarily, in the wake of August's Russians default and the emerging market turmoil, causing another short-term flight to quality. Returns in 1998 on high yield bonds in the U.S. were slightly above 4.0% for the entire year, about 8.5% lower than historical averages. Return spreads also were much below average (-8.7%).The default rate was again relatively low, 1.60%, and losses from default 1.1%. Despite 1998's low relative return, net returns (after deducting losses from defaults) over the last two decades continue to show a compound result over 12% per year and spreads over U.S. Treasuries of over 2.5% per year. New insurance of high yield debt in 1998 totaled a record $152 billion, with $120 billion of the total in the first seven and a half months.This report documents the high yield debt market's risk and return performance by presenting default and morality statistics and providing a matrix of average returns and other performance statistics over relevant periods of the market's evolution. Our analysis covers the period 1971-1998 for defaults and 1978-1998 for returns. In addition, we present our annual forecast of expected defaults for the next three years (1999-2001). Two other reports, published by the NYU Salomon Center, comprehensively document the performance of defaulted public bonds and bank loans and the default rate experience on syndicated bank loans.

Suggested Citation

Altman, Edward I. and Cooke, Diane and Kishore, Vellore, Defaults & Returns on High Yield Bonds: Analysis Through 1998 and Default Outlook for 1999-2001 (1999). NYU Working Paper No. S-CDM-99-01, Available at SSRN: https://ssrn.com/abstract=1295841

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Diane Cooke

affiliation not provided to SSRN

No Address Available

Vellore Kishore

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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