Loss base rates

What the asset class has historically lost, attached to every fund in it.

The realized audited PARI number states what a cohort lost in a given period. Loss base rates state how bad it has gotten across the longer record. A base rate is the loss an asset class has run at over a long history, before anything specific to one fund is known. They are compiled once per asset class from industry wide records, insurance claims data, write off surveys, default and recovery studies, and attached to every fund classified into the class: a median annual loss rate for calm periods and a stressed rate for downturns. They are realized figures drawn from history, not a forecast of the next year.

History supplies the discipline. High yield bonds are corporate bonds from lower rated borrowers, the part of the credit market that defaults first when conditions turn. Moody's records show US high yield default rates peaking above 10 percent in 1991, 2001, and 2009. The calm years between those peaks were real, and so were the peaks. A loss assumption built only from the calm years would have been wrong three times in three decades, which is why the base rates carry both numbers, so a consuming system can plan against both.

Because this layer belongs to the asset class and not the fund, it is the severity anchor a fund cannot opt out of by withholding data. A fund that reports nothing still carries its asset class's loss history. A fund's own verified record can refine the picture at higher tiers; it cannot erase the industry's.

The base rate publishes as the loss rate itself, in percent, so a lender can size a loss directly. The figures, 0.4 percent typical and 1.6 percent stressed, travel with the asset class and with every fund in it. Both numbers carry the records they were compiled from, so a consuming system can trace each figure back to its source.