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The sensitivity of corporate bonds to the economic environment essentially depends on their time to maturity. In the short term, default risk for investment grade corporate issuers is primarily due to nonsystematic factors, for example, cases of fraud or litigation. Over longer term horizons, conversely, systematic factors tend to have a higher impact on the default probability of corporate issuers. Changes in the economic environment and business risks in the sense of adverse industry trends or increasing competition are major drivers of credit risk and hence for spreads in the longer term. Therefore, one would expect the spreads of long and intermediate investment grade corporate bonds to be more sensitive to indicators of economic activity than short-term bonds. This implies that credit curves should flatten when the economic outlook improves. Rising confidence in the corporate sector additionally spurs investors’ willingness to take on more spread duration. Consequently, in periods of spread tightening investors should expect credit curves to flatten. In other words, the slope of the credit curve and the level of credit spreads are positively correlated for investment grade issuers.

Amajor reason why sectors experience significant shifts in their average ratings is the degree of cyclicality. Noncyclical sectors usually have a stable credit trend whereas cyclical sectors are heavily dependent on economic cycles and their rating outlooks move in tandem with the economy even though it has to be pointed out that the rating agencies try to rate through the economic cycle, meaning that cyclical swings should be incorporated in a company’s rating. Macroeconomic dynamics can drive the negative credit trend of industries and single companies, affecting their credit spreads even more than company-specific problems and risks. At this stage we want to point out that external shocks, which endanger geopolitical stability, can bring the whole economic system in disorder. After the tragic events of 11 September 2001 the airline and leisure industries were hit the hardest and a spread widening of 360 and 185 bps respectively was recorded. An average widening of 30–40 bps across all other sectors occurred in the short term, whereas the cyclical industries like automobiles showed higher spread movements than noncyclicals.