The market for high yield or speculative-grade bonds1 has grown from $30 billion of outstanding bonds in 1980 to nearly $250 billion today. Over this period, the market has evolved from a collection of “fallen angels”—bonds that have lost their investment-grade rating—into an established capital market for raising funds. Although the high yield market is now mature, its behavior during business cycle downturns is not well understood. During the severe recessions of 1980-82, when the market was in its infancy, few issuers of speculative bonds defaulted on their obligations to creditors. By contrast, in the mild recession of 1990-91, the default rate soared to 11 percent. These sharply divergent experiences raise the question:.
