Default Risk

Published on Apr. 27, 2018

Default Risk

Did You Know…

The amount bond holders can recover once a bond has defaulted can vary? Typically, the recovered amount is less than par. And because the bankruptcy process can be drawn out, investors could find themselves stuck with non-interest bearing investments for an unknown period of time.

To gauge default risks, credit ratings are often used to determine the health of the issuer. Lower rated issues frequently are less liquid than conservative, higher-rated investment grade securities.

The chart below illustrates default rates for the spectrum of bond ratings.

What are we thinking?

It is pretty evident which ratings class has the highest default rates. Global investment grade corporate debt has only seen one default in the last five years, while global speculative-grade bonds have defaulted 429 times in the same time period.

It is easy for investors to be lured in by yields offered in the high yield, non-investment grade space, especially when the pace of ratings upgrades actually increased last year, but this exposure can increase your portfolio’s risk.

To mitigate this risk, the Current Income Portfolio only invests in investment grade corporate bonds and preferred securities at purchase. Our risk conscious approach includes ongoing monitoring of credit ratings, interest rate sensitivity, callability, sector mix, and structure risks – with a continued focus on income generation in both a low and rising rate environment.

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