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.
Public research record
Research framework · page evidenceCompleted application: Distressed Ratio
Distressed ratio is the cleanest forward signal on the credit cycle. Allocator behavior often shifts when it crosses key thresholds.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The percentage of high-yield bonds trading at spreads over 1,000bp — a leading indicator of the default cycle. | Credit |
| Release fact | 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. | 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
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.