2023 Fixed Income Default Study

We forecast defaults in developed markets to increase from last year’s all-time lows, but remain below long-term trends:

• Euro high yield at 3.4% driven by expected weaker fundamentals and higher rates, but mitigated by the fact that there are relatively limited refinancing needs. These forecasts range in the middle compared to those of a selection of sell-side strategists.
• US high yield at 3.3%, towards the lower end of forecasts from the same selection of sell-side strategists.

In Asia ex-Japan, we expect a modest 0.7% default rate. Focusing only on high yield issuers, our projected default rate is 3.9%.

For emerging market (EM) corporates, we expect a 1.9% default rate, or 4.3% when considering only high yield

Our projections for EM corporates and Asia ex-Japan are lower, largely due to improved sentiment in the Chinese property market.

These projections translate into the following total return forecasts (also taking into account our rates and spreads forecast):

• US high yield looks to have a high return potential with relatively limited downside risk.
• Asia high yield appears to be the highest potential return sector, albeit with the potential for a wide dispersion.
• In Euro high yield, the absolute yield level in local currency is lower due to lower EUR rates. However, it still looks attractive given the market is higher in quality compared to US high yield. At the current yield level, we see a nice cushion to mitigate any potential adverse movements in rates and spreads, thus expecting an outperformance over EUR IG by 1.5-2%.

 Total return forecast for 2023:

• US high yield 9-12%
• Euro high yield 2-8%
• Asia high yield 3-22%
• EM Corporates 8-10%

Please download the full study for more detail on our projections.