2027 Default Rates: Higher Risk Within The Left Tail

The rise in global yields has been accompanied by wider HY credit spreads, creating a dual headwind for firms approaching refinancing. Since the start of the year, USD HY all-in yields have risen by roughly 170bp, to 8.3%, while EUR HY all-in yields have increased by approximately 140bp, to 7.3%. In our view, the key issue for default risk is not the absolute level of yields, but rather where refinancing needs, weaker capital structures and sector-specific pressures overlap. We favor USD HY over EUR HY, as we expect the EUR market to remain more vulnerable in 2027. We forecast the US HY 12-month trailing default rate to rise modestly to around 4% (vs. 3.3% as of September), but remain slightly below its long-run average. By contrast, we expect the EUR HY default rate to remain around 5%, above its long-run average. In leveraged loans our regional preference is reversed, favoring EUR over USD. We forecast the USD leveraged loan default rate to remain elevated at around 5% in 2027, and e