A strong negative correlation between default rates and economic growth could always be expected, but during the economic crisis in the United States in the 1970s and 1980s a sharp increase of the default rates could not be observed. It was the economic slowdown in 1990, which was accompanied by extremely increasing default rates. The same acceleration of default rates occurred in 2001 due to a prolonged downturn of the economy, high political uncertainty after September 11, 2001, company accounting scandals, and aggregate weak credit fundamentals. Structural changes in the credit markets can explain the weaker than assumed relationship between the default rates and the economic cycle. This leads to the conclusion that the relationship between default rates and the spread level in the corporate bond market is a very complex one and that a good performance in the corporate bond market (tightening of credit spreads) can be consistent with increasing default rates at times where the market anticipates future decreasing default rates.

Although the close relationship between credit spreads and economic activity has held most of the time since 1950, the late 1990s witnessed a significant decoupling. Companies expected long-term stable and high growth rates, driven by new technologies like internet and mobile communication.

Coupled with a sustained rise in profitability, an idea strongly promoted by the Fed, this expectation caused companies to invest heavily and to leverage their balance sheets. In this period maximization of shareholder value was the credo of many managers. Despite strong economic growth credit markets punished the rise of financial and operating leverage that was observable across most industries and companies with widening credit spreads. Excessively high default rates in 2001 and 2002 showed that market participants anticipated the rise in systematic risk quite early. The sustained equity downturn and cases of fraud added to the woes of the credit markets.