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.
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.
Frequently asked
What's a normal default rate?⌄
Which sectors default first?⌄
Does QE suppress defaults?⌄
How do you trade the default cycle?⌄
Related terms
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