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

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%).