The cycle runs in four rough phases: repair, when spreads are wide and companies pay down debt; recovery, when earnings improve and spreads grind tighter; expansion, when leverage and aggressive structures return; and downturn, when defaults rise and spreads gap.
Spreads are usually tightest just as underwriting standards are worst, which is the central irony of credit investing. Bank lending surveys and the share of covenant-lite issuance are useful indicators of where in the cycle you are.
Example: high-yield spreads bottom at 280 basis points with issuance running at record volumes. Two years later defaults rise from 2% to 5% and spreads reach 750, a move that costs an unhedged index holder roughly four times a year of carry.
Related: high-yield, credit-spread-bonds, covenant-lite, default, recession