Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

4 August 2025

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

Firstlinks is sponsored by:
banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

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.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

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?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

Site Map

About Firstlinks

© 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.