Industrial production (IP) is another lagging indicator. Arobust relationship between high-yield spreads and industrial production is found at 0.76 with a 5–6 month lag. This means that a spread tightening in the high-yield market will induce an improvement in industrial production in a couple of months and give high-yield investors some comfort that spreads will be supported further in the future by better macroeconomic data like industrial production.

Industrial production is compared with default rates. A better IP is associated with increased profitability and cash flow situation of companies. This implies a better access to the capital markets and therefore lowers liquidity risk. As a result default rates will fall when IP rises and this translates directly into tighter spreads.

A robust negative correlation of around 0.75 exists between Moody’s trailing 12-month issuer-based default rate and the US year-over-year production for the period 1988–2003.