Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 475

S&P default rates and the risks in bond investing

While yields have increased in Australia, including on investment-grade bonds which are rated in the BBB space, it’s also good for investors to know their money is relatively safe.

Standard & Poor's (S&P Global Ratings) releases a report every year looking at default rates for each categoty of credit ratings over time. The 2022 report will be released in 2023 but the most recent report provides some good illustrations and commentary.

Global and Australian defaults statistics

In 2021, 72 global corporate issuers defaulted but most of these were in the non-investment grade CCC/C/B categories. The only default in 2021 from an Australian corporate was from Australian drilling services provider, Boart Longyear, and this was well flagged.

The majority of defaults were in the US, reflecting the breadth of the bond market over there.

Source: S&P 2022

The statistics show that global default rates in investment-grade have been extremely low over time.

Historically, the Australian default statistics are lower than the Global default statistics, in part due to it being a largely investment-grade market locally but also a concentration towards the major banks, which are all rated AA-.

Over the 30-year study period, investors should take confidence in investment-grade bonds. The table shows the probability of default for AAA rated to CCC/C rated, including average default rates of investment grade, speculative grade and all rated.

Source: S&P 2022

For example, a BBB-rated bond has a probability of default over five years of 1.48%. This increases to 6.19% and 16.67% for a BB and B rated bond. Digging deeper, a US BBB-rated bond has a probability of default of 1.83% implying that an Australian BBB-rated bond would have a probability of default over five years of significantly less than 1.48%.

Again, this shows the safety net of the Australian corporate bond market.

 

Matthew Macreadie is a Credit Strategist at Income Asset Management, a sponsor of Firstlinks. To discuss this topic further and access corporate bonds please reach out IAM. This article is general information and does not consider the circumstances of any investor. Please consider financial advice for your personal circumstances, including eligibility for these investments.

For more articles and papers from Income Asset Management, please click here.

 

3 Comments
Martin
September 18, 2022

Doesn't seem to deal with non-rated bonds where the problems in Australia seem to be. Covid tripped a few up/

Warren Bird
September 14, 2022

Thanks for the update Matthew.

Of course, what you haven't said - though it's something that I know you know! - is that default risk still needs to be managed appropriately. The high degree of safety in the Australian investment grade space won’t be much use to an investor who happens to have 10% of their portfolio in the bond that does default.

Yes, it’s a low probability of default, but it’s not zero. I’m going to sound like a broken record, I know, but the way to manage the risk that does exist is to diversify – to hold lots of small exposures to credit risk in different industries, not to hold just a few exposures. The beauty of this is that you don’t have to give up return in order to reduce risk. 100 bonds paying 1.5% above your benchmark will deliver the same gross return as 10 bonds paying 1.5% above your benchmark. But you have a much greater chance of actually earning that 1.5% in a diversified portfolio than a concentrated one.

I wrote about what credit risk is and how to manage it in these two articles 9 years ago. They’re not time-sensitive, so still apply today: https://www.firstlinks.com.au/give-risk-credit-deserves and https://www.firstlinks.com.au/managing-credit-risk-requires-healthy-dose-cynicism

Lisa
September 14, 2022

Thank you, I have a significant investment allocation in global and Australian BBB bonds, so am heartened and encouraged to read this report.

 

Leave a Comment:

RELATED ARTICLES

Opportunities in Floating Rate Notes

Never Evergrande: where to from here?

Four ways corporate loans can benefit your retirement income

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.