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Posted By admin on November 21, 2009

Capacity utilization (CAPU) emerges as an important factor for high-yield investments because it is a good indicator for the direction of high-yield spreads. The strongest correlation (0.76) is found by lagging CAPU rates by about six months. Low CAPU rates are not sustainable in the long term. Companies have to adjust their business models in order to address the overcapacity. A strong correlation can be found between CAPU rates and Commercial and Industrial lending. The year-on-year change in Commercial and Industrial lending will fall with falling CAPU rates and vice versa.

Sectors with high utilization rates will experience greater manufacturing demand and will probably benefit from a better pricing power. On the other hand, sectors with low CAPU rates are more likely to have little or no pricing power and are forced to shrink the available capacity. This implies that sectors with improved CAPU rates on a year-on-year basis should experience tighter spreads than sectors with worsening CAPU rates where spreads should tend to widen.

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