Default Cycle
The multi-year pattern of corporate default rates, driven by leverage build-up in benign periods and forced restructurings in downturns.
Definition
Default cycles typically last 5–10 years: leverage accumulates when credit is cheap, then a shock (rates, recession, sector-specific) triggers a wave of downgrades and defaults. Peak default rates usually arrive 12–18 months after spread peaks.
Moody's and S&P publish 12-month trailing default rates; Moody's also publishes a forward base/bear/bull forecast.
Public research record
Research framework · page evidenceCompleted application: Default Cycle
Default cycles drive HY total returns asymmetrically. Avoiding the worst 10% of credits typically delivers more alpha than picking the best.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The multi-year pattern of corporate default rates, driven by leverage build-up in benign periods and forced restructurings in downturns. | Credit |
| Release fact | 2020: HY default rate peaked at ~8% in late 2020 driven by energy and travel — well below the 14% Moody's bear case, thanks to Fed credit support. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
Why it matters
Default cycles drive HY total returns asymmetrically. Avoiding the worst 10% of credits typically delivers more alpha than picking the best.
Worked example
2020: HY default rate peaked at ~8% in late 2020 driven by energy and travel — well below the 14% Moody's bear case, thanks to Fed credit support.