High yield spreads no longer correlated to default rates: Jerry Tempelman column

jerry-tempelman

The valuation of investment assets is an outcome of two main factors. In the long run, valuations are generally thought to be determined by underlying fundamentals. In the short run, however, valuations can be driven by investor sentiment.

For high yield bonds, underlying fundamentals can be proxied by the speculative grade corporate default rate. Identifying a proxy for investor sentiment is not quite as straightforward, but we could do worse than to use the VIX index, which is colloquially

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