My apologies if this is not mathematical enough for this outlet.
My understanding of the pricing of a bond ETF is that lowering interest rates drive the price up and increased risk of default drives the price down. I'm trying to wrap my head around the dynamics of what happened to high yield corporate bonds around the great recession. Looking at a few of them, they lost in the neighborhood of 50% of their value at the bottom of the curve, which is about the same loss as the S&P 500.
During this period interest rates went from 5.2% to near 0%. Absent changes in default risk, this would imply that the price should have gone up. Obviously default risk went way up during the recession, but wouldn't this price change essentially mean that the market was pricing in a >50% chance of default for the underlying bonds? That seems to me to be curiously excessive even given the environment at the time. Was default risk the only thing driving the loss of value, or were there other factors in play?
Bonus question: How would the recession have affected an ETF with a fixed maturation timeline, such as iShares iBond? How would maturation date relative to the recession have played a role?