Nov. 5 (Bloomberg) -- The global speculative-grade default rate rose to 12.4 percent in October, the highest proportion of defaults since the Great Depression, according to Moody’s Investors Service.

The annual rate at which companies worldwide fail to meet their commitments may peak at 12.5 percent next month, Moody’s said in a report today. The New York-based firm revised its September figure to 12.3 percent, also higher than the 12.2 percent rate reached in 1991. The total number of defaults declined to eight in October, the lowest monthly count this year and down from 19 in September, Moody’s said.

“The global default rate is now likely near its cyclical peak, as indicated by a rapidly slowing pace of defaults in recent months,” said Kenneth Emery, the director of corporate default research at Moody’s. The firm’s model predicts eight to 10 defaults per month on average for the coming year, down from the rate of 20 per month for the past year.

While stocks have rallied, with the Morgan Stanley World Index gaining 21 percent this year, the economy remains weak and credit is scarce. The Federal Reserve yesterday pledged to keep interest rates “exceptionally low” for an “extended period,” and the Bank of England said today it’s extending its bond- purchase plan by a further 25 billion pounds ($41 billion), the third increase since March.

U.S. banks tightened standards on loans in the second quarter and expect to restrict lending until at least the second half of 2010, the Fed’s quarterly Senior Loan Officer survey showed in September.

Significantly Lower

Even with the increased level of defaults, junk bonds in the U.S. returned almost 51 percent this year amid investor demand for higher-yielding assets. The yield on the debt relative to Treasuries narrowed to 755 basis points yesterday, down from this year’s high of 1,886 basis points, according to Merrill Lynch & Co.’s U.S. High Yield Master II index. A basis point is 0.01 percentage point.

High-yield, or junk, bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.

“The fact that Moody’s is saying default rates are near the peak is probably the most relevant thing,” said Alex Moss, who helps manage 80 million pounds of assets as head of high- yield at Insight Investment Management in London. “People thought they were going to be a whole lot higher but now we see defaults will be significantly lower than predicted.”

October Rate

In the U.S., the October default rate rose to 13.4 percent, from a revised 13.2 percent in the previous month, while the European rate increased to 9.4 percent, Moody’s said.

It’s surprising that the default rate isn’t higher because the creditworthiness of issuers has declined in the last 30 years, according to Gary Jenkins, head of credit research at Evolution Securities Ltd. in London.

In the 1970s, the high-yield market primarily consisted of companies rated in the Ba category, the highest speculative- grade rankings, according to data compiled by Evolution. Today, the market’s dominated by companies rated in the B and C categories, at least four levels below investment grade, Jenkins said.

Six of the eight defaults in October were so-called distressed exchanges, such as that carried out by Atlantic Express Transportation Corp., a school-bus operator in Staten Island, New York. The total of such transactions this year is 79, or about 34 percent of the total 235 defaults so far this year, Moody’s said.

Capmark Financial

Capmark Financial Group Inc., the Horsham, Pennsylvania- based lender to office and apartment builders, and True Temper Sports Inc., the Memphis, Tennessee-based maker of sports equipment, missed interest payments, according to Moody’s.

The headline default figures are deceptive because they measure the previous 12 months and in reality defaults peaked in the first quarter of this year, said Martin Fridson, chief executive officer of New York-based Fridson Investment Advisors.

“The trailing 12-months figure has continued to rise as a function of year-ago, low-default months dropping out with the addition of each new month,” he said in an e-mailed note. “The latest months have had higher default counts than their year- earlier corresponding months, but lower counts than those of a month or two earlier. Spreads have narrowed appropriately as defaults have tapered off.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: November 5, 2009 11:19 EST