tr,

It seems as if the yield spread is a good indicator of relative risk of default, but it doesn't seem like it's necessarily much of a leading indicator. More of a rear-view mirror indicator. I'm just eyeballing the total number of defaults off a graph at PIMCO, and it's not very good resolution, but the peaks in yield spread conform almost perfectly to peaks in numbers of corporate bond defaults. The absolute numbers (based on # of issuers) don't look so good in 2000-2001, but in terms of monetary value, there's a much better correspondance (about $35 B in 2000, $75 B and counting in 2001).

The article this came from doesn't think corporate debt is all that attractive right now. It would be nice if the graph included the total amount of corporate debt over the last 30 years so you could decide if the "bubble" is really as large as it looks, or if it would just look like a molehill expressed in per capita terms on a log scale.

      Yield   Approx #
Year  Spread  Defaults 
1970    60 
1971   220
1973    70        3
1974   240        5
1978    50        5
1980   220        5
1981    70        3
1982   340       15
1984    90       12
1986   250       25
1989    80       25 
1992   200       60
1994    80       15
1998   240       30
2000   140      110
2001   340      120+

http://www.pimcofunds.com/PIMCO?op=www&mainsection=bond_center&subsection=commentary&request=investment_outlook&content_id=35267

Todd