What is the primary method to forecast defaultable bonds?

The primary method to forecast defaultable bonds revolves around an analysis of the business cycle. This approach is crucial because the performance of defaultable bonds is closely tied to the overall economic environment. The business cycle influences a company's ability to generate revenue and meet its debt obligations; hence understanding where the economy stands can give insights into the likelihood of defaults on bonds.

During periods of economic expansion, default rates generally decline as businesses thrive and increase revenues. Conversely, in recessions, default rates often rise as companies face declining sales and may struggle to meet their financial commitments. By focusing on the business cycle, investors can assess the potential risks associated with defaultable bonds and make more informed investment decisions.

Other methods like market news analysis, technical indicators, and consumer sentiment surveys may provide additional insights but do not directly relate to the fundamental drivers of bond default risk as effectively as understanding economic cycles. Market sentiment can shift quickly and may not reflect the underlying financial health of issuers, while technical indicators are primarily used for short-term trading decisions rather than assessing credit risk. Consumer sentiment surveys, while useful for gauging economic trends, do not provide a detailed picture of a specific issuer’s ability to meet obligations in the same way that a business cycle analysis does.