Corporate debt

Investors have unclenched their grip on safe assets since the market nadir in March and begun to reach out for lower quality assets. Barclay’s US corporate high yield index has delivered a total return of 25 per cent so far this year. And with $15bn worth of high yield bonds issued in May – the most since October 2007 – debt markets appear to have reopened to risky borrowers. Yet investors would be wise to hold back.

In the last two downturns, default rates on speculative grade debt peaked in the year after each recession ended at around 12 per cent, before returning swiftly to low levels as the US economy recovered. In the 1980s, the peak in defaults was much lower, but was only reached four years after the recession ended. This downturn may combine the worst of both worlds.