Key points
- Reflected in credit spreads (wider = higher risk).
- Increases during recessions, sectoral downturns, or idiosyncratic crises.
- Rated by agencies (Moody's, S&P, Fitch); changes trigger bond repricing.
Example
If a retailer reports collapsing sales and rising debt, its default risk rises. If its bond spread widens by 200 bps and the bond has a duration of 5, the price falls about 10%.
In history
High-yield default rates spiked from ~2% (2019) to 6.8% (2020) during COVID, then normalized to ~2-3% by 2023.
Related terms