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Posted By admin on November 11, 2009

The distress ratio is an indicator for the current state of the high-yield market. It can be defined as the percentage amount of all outstanding highyield bonds trading at a spread of at least 1,000 bp over a comparable government bond. The lower the distress ratio the better the shape of the high-yield market.

There is a lag of around four months between the distress ratio and Moody’s default rate observable for the US high-yield market. At a correlation of 0.89 we can conclude that the current levels of the distress ratio allow to make a reasonable forecast for future default rates. A falling distress ratio implies falling default rates in future.

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