Expert predicts spike in defaults heading into year-end

Jim Millstein, the co-chairman of Guggenheim Securities, said financial markets are headed into a period of “significant volatility” with default rates expected to spike as we move closer to the end of the year.

“Fasten your seatbelts, it’s going to be a bumpy ride,” Millstein said Tuesday in a Bloomberg Television interview.

Defaults will pick up as tumult in the financial markets persists, he said. “The continuing inability to get the pandemic under control in the United States,” the upcoming election and “a change in macroeconomic policy at the Fed” all contribute to the ongoing volatility.

Ratings companies are also forecasting more defaults. The rate fell in August, as expected, since the last month of the summer is typically slower for nonpayments. But S&P Global Ratings expects the the pace of defaults to increase “amid the continued impact of Covid-19 on economic and credit conditions,” Sudeep Kesh, head of S&P global credit markets research, wrote in a report last week.

Polarized politics

Millstein, who was the restructuring chief at the Treasury Department in the wake of the financial crisis, cited polarized politics as a reason for uncertainty in the equity and credit markets. “The election itself will serve as a significant source of volatility” as November approaches, he said.

The first stimulus bill from the government “put a floor under the economy and credit markets,” Millstein said. Heading into the election, “it isn’t surprising Washington” hasn’t been able to close in on the next steps to support jobs and growth.

Pressure is also mounting at the corporate level for landlords who rely on businesses to make a profit and pay their rent, according to Millstein. “Some businesses that are barely hanging on are not paying,” and landlords will have a “hard time” as a result.

Hardships will pile on, Millstein says, pointing to weakness across many sectors of the economy. The default rate on commercial mortgage-backed securities will approach high single digits by year-end, Fitch Ratings predicts.

Continuing high unemployment rates and virus-related shutdowns will lead to a “froth around commercial real estate markets,” Millstein said. Skipped payments will create a ripple effect across the sector, creating “a significant hit” on the economy.