GlossaryBloodBath Indicator
BloodBath Indicator
The ratio of the short-term US interest rate to an assumed risk premium for high-yield bonds, read against its 100-week average. When the curve rises above the average, money is getting more expensive faster than the assumed risk premium can bear: an environment that is getting tighter for risk assets.
Zones
The zones compare with the current average, the last value of the blue line:
Reference lines are at 0 and at the current average.
How to read it
What matters is the distance to the blue line: if the curve is above it, the rate has risen faster relative to the risk premium than on average over the last two years. The “Formula invalid” phase is not a market condition but a calculation artifact of the fixed assumption.
Limitations
- Approximation in two respects: The effective Fed Funds Rate is used instead of the yield on three-month US Treasury bills. The two run closely together except around rate turning points, where the Fed Funds Rate can lag. And the spread is a fixed assumption, not a measured risk premium.
- Staircase: The rate enters as a monthly value, so the curve runs in steps.
- Independent of the symbol: The curve is the same on every chart; your chart only provides the time axis. On a symbol that only trades on market days, however, 700 daily candles cover about 2.7 years instead of 100 weeks.
- Meant for daily to weekly charts.