November 14, 2019 - While some headlines might suggest otherwise, we know that markets ebb and flow. After all, that’s what makes them markets. Today we are doing a short pre-holiday check in on how that ebbing-and-flowing loan market is doing.
First, as has been discussed everywhere – including these pages – we have been in a “shift to quality” mode. This is demonstrated by a bifurcation by credit in the primary and secondary market and an appetite for safety and quality. And, perhaps unsurprisingly, this change is happening in advance of any changes in actual default rates. We deconstruct these trends below.
First, credit quality. While default rates certainly are low, they are forecast to rise (albeit to still-moderate levels) in the coming years. To wit, Fitch’s trailing 12-month loan default rate sits at 1.7% but is expected to climb to 3% around year-end 2020. (However, Fitch also notes that nearly half of loans that default could have a greater than 90 cent recovery.)
