showthat a large part of the variation in credit spreads can be explained
by systematic (stock market) risk factors. The spread between highyield
bonds and investment grade bonds is also considered to be an
indicator of economic conditions. Awidening of this spread indicates a reduced
risk appetite and worsened economic outlook. As a consequence,
ratings should decline and spreads increase. The level and slope of the
risk-free term structure is also considered to be one of the most important
indicators of economic conditions.