There is a faint, but noticeable odor, from the corporate bondmarket that suggests something may be going bad–and on a day whenglobal stock markets took a tumble it might be worth investigating.In January, the 12-month trailing rate of defaults in speculativegrade debt in the U.S. rose to 1.39%, a 10% increase from the raterecorded in December 2006, according to a recent report fromStandard & Poor's. Worse, as the U.S. economy slows, S&Pfurther projects that the default rate in these junk bonds willcontinue this rise throughout 2007, hitting 2.33%–up almost 7% overthe year. And this is not even the pessimistic scenario: If theunemployment rate hits 5.6% (instead of the currently projected4.7%) and corporate profits begin to decline, the default ratecould almost double, to 3.52%, by yearend. While that number wouldstill be below the long-term average default rate of 4.54%, itsuggests a trend that won't make executives or investors happy.S&P's managing director Diane Vazza gives a 25% probability forthe worst-case scenario to unfold.
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