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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
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