Bond default rates by credit rating follow a steep curve: S&P Global’s long-run data shows AAA corporate bonds default at a ten-year cumulative rate of 0.81%, while CCC/C-rated corporate bonds default at 55.70% over the same window.1S&P Global Ratings. S&P Global Ratings Definitions – Section: Long-Term Issue Credit Ratings The risk does not climb gradually as ratings drop. It rises exponentially, and the biggest single jump sits at the boundary between investment grade and speculative grade.
The Historical Numbers, Grade by Grade
S&P Global’s annual default study tracks every rated corporate issuer back to 1981. The ten-year cumulative default rates from that dataset break down as follows:
- AAA: 0.81%
- AA: 0.96%
- A: 1.57%
- BBB: 3.80%
- BB: 12.90%
- B: 24.20%
- CCC/C: 55.70%
Over shorter horizons the same pattern holds with smaller absolute numbers. Investment-grade bonds as a group, from AAA through BBB-, carry one-year default probabilities below 0.1%.2Federal Reserve Bank of New York. Understanding Aggregate Default Rates of High Yield Bonds Annual rates on speculative-grade bonds run much higher and swing hard with the economy in a way investment-grade rates do not.
S&P and Fitch use the AAA-through-D scale, with plus and minus modifiers from AA down to CCC. Moody’s uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C, with numerical modifiers 1, 2, and 3 marking the top, middle, and bottom of each category from Aa through Caa.3Moody’s Investors Service. Moody’s Rating Scale and Definitions Cumulative default studies published by each agency use their own labels but describe the same underlying pattern.
Where the Risk Curve Bends
The gap between A-rated and BBB-rated corporate bonds over ten years is about two percentage points. The gap between BBB and BB, a single notch on the scale, is nearly ten percentage points: 3.80% versus 12.90%. That is where the curve bends sharply upward, and it is exactly where the market draws its most important line.
For S&P and Fitch, investment grade ends at BBB- and speculative grade begins at BB+.4S&P Global. Understanding Credit Ratings – Section: Ratings Scale For Moody’s, the boundary sits between Baa3 and Ba1.3Moody’s Investors Service. Moody’s Rating Scale and Definitions Many pension funds, insurance companies, and bond index funds are prohibited by regulation or internal guidelines from holding speculative-grade debt. When a bond crosses that line on the way down, forced sellers unload it, and the price drops even if the issuer’s underlying condition changed only marginally.
By the time you reach CCC/C, more than half of issuers default within a decade. Buying at that level is closer to a bet on restructuring outcomes than a conventional lending decision.
What “Default” Actually Means in These Numbers
Rating agencies define default more broadly than a missed payment. A corporate default in S&P’s data includes failure to pay principal or interest on the due date, bankruptcy filings, and distressed exchanges in which bondholders accept a new security worth less than the original.5S&P Global Ratings. S&P Global Ratings Definitions – Section: General-Purpose Credit Ratings A company that persuades creditors to swap a $1,000 bond for one worth $600 has defaulted even without a bankruptcy filing.
Technical defaults, meaning covenant breaches that do not involve a missed payment, are not counted in these figures. The published default rates track payment defaults, bankruptcies, and distressed exchanges, so the numbers reflect the most severe outcomes.
Recessions Change the Picture
Long-run averages blend calm years and crisis years into a single number. Investment-grade default rates barely move during downturns because those issuers hold cash reserves and retain market access. Speculative-grade defaults, on the other hand, cluster hard in recessions.
The U.S. trailing twelve-month speculative-grade corporate default rate stood at 3.8% as of January 2026, up from 3.7% at the end of 2025. S&P Global Ratings forecasts a base case of 3.75% by December 2026, with a pessimistic scenario of 4.75% and an optimistic scenario of 2.5%.6S&P Global Ratings. Default, Transition, and Recovery: January Corporate Defaults Almost Entirely U.S.-Based Those are moderate figures by historical standards. The speculative-grade rate spiked above 10% during the 2008–2009 financial crisis and exceeded 12% in the early 2000s downturn.
Municipal Bonds Are Not Comparable
A letter grade on a corporate bond and the same letter grade on a municipal bond do not carry the same default probability. S&P Global’s data through 2024 shows municipal ten-year cumulative default rates well below corporate rates at every notch:
- AAA: 0.00% municipal vs. 0.81% corporate
- AA: 0.03% municipal vs. 0.96% corporate
- A: 0.08% municipal vs. 1.57% corporate
- BBB: 0.73% municipal vs. 3.80% corporate
- BB: 4.14% municipal vs. 12.90% corporate
- B: 10.32% municipal vs. 24.20% corporate
- CCC/C: 36.31% municipal vs. 55.70% corporate
A BBB municipal bond has historically defaulted less often than a AAA corporate bond. State and local governments have taxing authority and essential-service revenue streams that corporations lack. A city can raise property taxes to cover debt service; a company facing falling revenue has no equivalent lever.
Default Rates Don’t Equal Losses
How often a bond defaults is only half the story. What matters to your return is how much you get back after a default. That figure is the recovery rate, and one minus the recovery rate is the loss given default.
Recovery depends heavily on where the bond sits in the issuer’s capital structure. Moody’s found the following average recoveries on defaulted corporate bonds over 1982–2003:
- Senior secured: roughly 51–53 cents on the dollar
- Senior unsecured: about 33 cents on the dollar
- Senior subordinated: approximately 39 cents on the dollar across the full period, with sharp year-to-year variation
Senior unsecured bonds, the most common type in institutional portfolios, historically recover about a third of par.7Moody’s Investors Service. Recovery Rates on Defaulted Corporate Bonds and Preferred Stocks Combine that with a default rate to get expected loss. If a B-rated bond has a ten-year cumulative default rate around 24% and recovery averages 33 cents, the expected credit loss over that period runs roughly 16% of par (24% multiplied by a 67% loss given default). Expected loss defined as default probability times loss given default is the foundation of how banks set capital requirements and how portfolio managers price credit risk.8Federal Reserve Bank of Chicago. Loss Given Default and Economic Capital
Recoveries are cyclical too. In healthy economies distressed assets attract more bidders and recoveries run higher; in recessions, when defaults cluster and buyers are scarce, recoveries fall and losses compound at the worst possible time. High-yield recoveries in 2010 averaged about 57% of par, unusually strong because many of those defaults were distressed exchanges rather than full liquidations.
Ratings Move Over Time
A rating is a snapshot. Issuers get upgraded and downgraded, and the cumulative default rates by rating already reflect that movement. An issuer rated BBB at the start of a ten-year window that drifted down through several downgrades before defaulting still counts as a BBB default in the original-rating cohort. That is why even AAA shows a nonzero ten-year default rate: a handful of issuers rated AAA at the start of the observation period migrated downward over the years before eventually defaulting.
The most watched form of migration is the fallen angel, a bond that was investment grade at issuance and has since been downgraded to speculative grade. Over a twenty-year observation, Moody’s found that nearly a quarter of fallen angels climbed back to investment grade, about half remained in speculative-grade territory without defaulting, and roughly 12% eventually defaulted.9European Central Bank. Understanding What Happens When “Angels Fall” That 12% default rate runs below the overall speculative-grade rate, in part because fallen angels once had the financial strength to earn an investment-grade rating and often retain some of that resilience. Rising stars, the mirror image, are speculative-grade issuers upgraded to investment grade. Either way, the rating you see today is not the rating the bond will carry when it matures or defaults.