The state of the US equity market also helps to give direction to the bond default rate. A well-functioning equity market helps to assure ample liquidity. In the extreme case of infinite liquidity, defaults would be nonexistent.
To the degree business assets are attractively priced, financially-stressed firms will find it easier to obtain relief via injections of common equity capital. For example, firms can secure more cash through the divestment of business assets when equity markets thrive.
Thus, the record shows that the moving 12-month average of the VIX index tends to lead the high-yield default rate. Recently, the VIX index’s moving 12-month average sank to a record low 12.2 points.
As inferred from their long-term statistical relationship, if the VIX index’s yearlong average remains under 13.25 points, the default rate is likely to dip under 2%. It may be premature to consider the possibility of a rising default rate until the VIX index’s unprecedented slide is reversed.
