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Direction of equity markets. The current state of the equity market has an effect on default rates because it determines asset values, investor’s sentiment towards risky assets and the accessibility of capital markets for companies.

Age effect of bonds. The likelihood of payment default by a bond issuer can change with decreasing time to maturity. At the time of issuance, the new issuer has abundant cash and payment default is easily avoided. In addition it is quite common to put some restricted cash from the issuance into an account to cover the first 3–4 coupon payments. Over time the “hazard rate” grows as cash reserves gained through the bond issue are used. The critical period is reached when the success of the firm is least certain and the hazard rate is at a maximum. However, after corporate plans are successfully implemented and sufficient profit has been generated to offset debt, the critical phase is past and the likelihood of payment default declines rapidly. Several empirical studies show that the critical time after first issues is approximately 3 years after issuance for B-rated bonds and climbs to approximately 4 years for BB-rated bonds. The amount of defaults drops significantly after the critical period of the first 3–4 years is survived by the issuer.

Quality of new issue volume. An important measure for the quality of the high-yield market is the percentage amount of new issuance being used to refinance debt. During periods of balance sheet repair (1990–93 and 2001–03) the percentage of total new issue volume will reach high levels.

Try to avoid debt whenever it’s possible. Your intention should be to save as much money as you can, so when difficult times come you will be able to live off your savings. Unfortunately the bankruptcy law has been recently changed, so it is more difficult to simply declare bankruptcy.

Secondly, pay off your mortgage quickly, because the housing market will most likely collapse even further. For example, if someone paid $300,000 for a house and then sells it for $200,000, he or she might end up not only not owning their house but also having a $100,000 debt.

It is also a good idea to purchase some inexpensive land in the country area. Build a house, or simply buy a used RV. Anyway, make yourself sure that you are the owner of the house free and clear. This will allow you to live a rent-free and mortgage-free life for as long as it is necessary.

Finally, spend some time developing skills that will always be in demand. You might consider becoming a decent electrician, handy-person, carpenter or even a cook. In times of economic recession there won’t be much demand for people with deep understanding of content management systems, but somebody able to build a house will always have a place to crash.