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Following a historic fall, both in terms of duration and magnitude, an equally exceptional rebound has been observed on the markets.
While this rebound initially disconcerted many investors because of its decorrelation with the real economy, it is now well explained and understood.
Two months ago, we were in a situation where the rating agencies, which had been largely criticized for the slow adjustment of their ratings in the wake of the 2008 crisis, took the opposite stance and massively downgraded companies in record time and without any distinction.
Rating agencies assessed the impact of the crisis on business fundamentals before central banks and governments announced their accommodative measures.
As a result, rating agencies, and part of the market, anticipated an extremely large number of upcoming defaults. For example, in March, S&P Global Ratings stated that the default rate for high-yield bonds was heading towards 10% over the next 12 months, more than triple the 3.1% rate that was recorded at the end of 2019. Similarly, Fitch Ratings1 forecasted a 17% default rate for the US energy sector.
Over the last month, however, markets have been able to refine this analysis and recognize that the picture has fundamentally changed. This exceptional situation has had an equally exceptional response, never observed throughout previous crises:
- Central Banks, which had taken four years to react to the 2008 crisis, injected substantial amounts of liquidity into financial markets to contain the situation.
- Governments put aside public deficit concerns to help national companies and preserve employment.
- At the same time, the month of May, which was particularly eventful with a large number of high-yield companies releasing their Q1 results, gave investors a little more insight into the situation of the second quarter and reassured them about the financial health of many highyield companies.
1Source: Bloomberg, March 2020
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