Distressed Ratio
The percentage of high-yield bonds trading at spreads over 1,000bp — a leading indicator of the default cycle.
Definition
The distressed ratio counts how many HY bonds (by issuer or market value) trade above the 1,000bp threshold that historically precedes default within 12–24 months. It rises before default rates do, making it a better leading signal than trailing defaults.
When the distressed ratio crosses 10%, the credit cycle is typically turning.
Why it matters
Distressed ratio is the cleanest forward signal on the credit cycle. Allocator behavior often shifts when it crosses key thresholds.
Worked example
Q1 2020: distressed ratio spiked from ~3% to ~30% in weeks before defaults rose. By Q4 2020 it was back below 5%, predicting the muted 2021 default wave.
Frequently asked
Who publishes the distressed ratio?⌄
Is 1,000bp the right threshold?⌄
Does it work for loans?⌄
What's the lead time to defaults?⌄
Related terms
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