Credit spreads, defined as the yield difference between corporate bonds and US Treasury bonds of similar maturity, are critical for understanding market sentiment and economic health
Tightening credit spreads (low spreads): Suggest investors are confident and willing to take on risk, leading to stronger equity markets and lower borrowing costs for companies.
Widening credit spreads (high spreads): Indicate fear or risk aversion, often due to concerns about corporate earnings, economic slowdown, or financial instability.
Credit spreads in the US remain very tight, despite market sell off, but have slightly widened recently, indicating some caution.
As of March 2025, spreads are relatively tight. Both below historical averages
Investment-grade corporate bonds at approximately 89 basis points
High-yield bonds at around 297 basis points.
Investors are still not seeing a lot of credit risk in the economy, and recent slight widening could suggest only small caution because of the uncertainties Trump has created.
This could, however, be a continuing risk since investors continue to be very optimistic about the overall economic health and earnings growth, and any disappointment could send spreads higher, like in 2022.
