Spreads explained

chart of the month


Merrill Lynch has designed an econometric model that helps explain over 90% of the movements in credit spreads since the beginning of 2000. The chart represents the five factors that help explain the movements in spreads. These are Moody’s speculative-grade default rates, the VDAX index of implied volatility, the slope of the swap curve, three-month equity returns and the proportion of triple-Bs within Merrill Lynch’s ERD0 index, that represents the AA-BBB segment of the high-grade sector.


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