Junk bond default rate drops to record low

The U.S. economy has slowed, but there’s still no outward sign of trouble in the corporate junk bond market. That has helped push yields on the bonds to their lowest levels since April.

Defaults on high-yield, high-risk bonds issued by U.S. and foreign companies fell to their lowest level ever in September, according to Standard & Poor’s.

The global default rate was 0.89% of outstanding junk bonds in the 12 months ended in September, down from a 1% rate in the period ended in August, S&P; data show.

The credit-rating firm attributed the minuscule default rate in part to increased lending by banks and other investors, so that already highly leveraged companies continued to have access to credit.

Junk bonds are those rated below investment grade.

Hurt by a sliding housing market, U.S. economic growth slowed to a 1.6% annualized rate, after inflation, in the third quarter. That was the weakest growth for any quarter in three years, and raised the prospect that more companies could have trouble paying their bills.

Yet investors have continued to snap up junk securities in recent months, pushing prices up and yields down. The average annualized yield on an index of 100 junk issues tracked by KDP Investment Advisors was 7.59% on Tuesday, down from 7.61% on Monday and the lowest since April 6. The yield hit a three-year high of 8.27% in late June.

Falling yields on Treasury issues and other high-quality bonds also have helped the junk market by making junk yields appear more appealing.