Signs of Recovery in Investment Grade and High Yield Spreads

🧠 Two Credit Spread Indicators to Watch Even if you are not a direct investor in credit bonds, sometimes it pays to watch the credit spreads for signs of cracks in the market before equity markets fully react. We'd rather be early than late right? When assessing the general credit health of the market, two signals deserve close attention: the #CDX Investment Grade Spread and the ETF I-Spread (as seen in #LQD). 📌 1. CDX Investment Grade (White Line on Chart) A synthetic measure of credit risk, CDX represents the cost to buy protection on a basket of investment grade (IG) names via credit default swaps (CDS). A rising CDX = rising fear. Since it is a synthetic, liquid market, it is often the fastest-moving credit risk barometer, reacting instantly to macro shocks, liquidity crunches, or systemic risk. Think of it as the "credit VIX" — high-frequency and highly sensitive. 📌 2. ETF I-Spread (Orange Line) The I-Spread compares the yield of a bond ETF like LQD to a duration-matched Treasury. Higher I-Spreads = investors demanding more compensation for credit risk in cash bonds. This spread reflects supply/demand pressures, ETF flows, downgrade concerns, and broad credit appetite in the cash bond market. 📉 Why These Indicators Matter When both CDX and I-Spreads are rising, the market is flashing broad credit concern. But when they diverge, it tells you something deeper: ➡️ CDX > I-Spread: synthetic markets are more risk-averse than the cash market — possibly signaling hedging activity or fear before it's priced into bonds. Less noise more signal. ➡️ I-Spread > CDX: cash bonds may be under pressure due to ETF outflows or idiosyncratic stress — technical selling, not systemic risk, may be driving the move. This can still be useful as you tells you to look for OTHER reasons why the ETF I-Spread diverges. This month's chart shows that the seas are calm in credit. Notice that spreads are near the bottom of the range for the month, likely a reflection of the subsidence of turmoil related to permanent tariffs. CDX tightening modestly while LQD’s I-Spread compressed even faster, suggesting ETF demand is absorbing credit risk more aggressively than the CDS market. 🧭 Interpretation: Cash is healing faster than CDS — perhaps a sign of yield-hungry investors stepping back into IG. All this is a signal of constructive credit sentiment — for now. 💡 For Fixed Income Investors Whether you're managing duration, evaluating risk-on/risk-off signals, or assessing dislocation opportunities — tracking both synthetic and cash credit spreads offers a fuller picture of the market's true credit tone. Nothing screams #activemanagement more than investing in credit. 📊 *FICM Chart sourced from Bloomberg #CreditMarkets #FixedIncome #ETFs #BondMarket #MarketSignals #InvestmentGrade #MacroRisk #SanJacAlpha #SpreadTrading #PortfolioInsights

US corporate spreads have largely recouped their widening that resulted from the volatility spike we saw back on August 5th. Using the Bloomberg US Corporate Bond Index and the Bloomberg US Corporate High Yield Bond Index as proxies for US investment grade and high yield spreads respectively, we are now back in line with the previous 12-months’ average, implying a sanguine outlook for the US economy in the coming quarters. We point this out because it highlights a key difference for those looking for a sizeable downturn in risk assets over the coming quarters. We are certainly expecting economic growth to slow in the next several months. But we caution not to confuse a soft patch with the onset of a recession. The key here is the catalyst for the growth slowdown. With the labor market cooling, we should expect to see income growth ease. But an income led growth slowdown has very different characteristics than a balance sheet recession. Balance sheet recessions tend to occur when high levels of private debt force individuals or corporates to collectively focus on paying down/paying off/restructuring debt rather than spending or investing. This often results in impaired assets, an increase in default rates and a de-leveraging of balance sheets. The result? Any economic downturn is magnified which then leads to an outsized drop in asset prices. Today, we see credit spreads doing just fine with banks continuing to perform in lock step with the broader market. The ingredients for a massive swoon in risk assets just aren’t there. Might we see some softness in asset prices as we head towards the elections? Sure. Equity prices do go down in bull markets. But something more sinister than a garden variety correction? The Fed is about to embark on an easing cycle which should help ease financial conditions at the margin. But more importantly, this is an income driven slowdown, not a balance sheet recession. Big difference.    

NOVEMBER CREDIT RECAP US INVESTMENT GRADE (IG): - IG corporates returned +0.65% in November, lifting YTD gains to 7.99%. - Spreads touched 85bp mid-month before retracing, ending just +1bp wider at 80bp. - The index yield closed at 4.76%. - Tech bonds lagged amid heavy issuance, AI-related concerns, and data center buildouts. - Oracle (ORCL) widened sharply: its $3.5B 5.95% 2055s, issued in September at +125bp, closed November near +180bp—55bp wider. - Ford (F) underperformed on plunging EV sales and recalls. - YTD IG issuance reached $1.729T, one of the largest on record. US HIGH YIELD (HY): - HY corporates returned +0.58% in November, bringing YTD to +8.01%. - Spreads tightened 12bp to 269bp, near the 5th percentile of the past 30 years, after briefly widening to 304bp mid-month. - The index yield ended at 6.57%. - YTD HY issuance totaled $345B. TREASURIES: - Returns were driven by falling UST yields. - The 2Y–7Y curve fell ~9bp, while the 10Y closed at 4.01% (-6bp). - 20Y (4.62%) and 30Y (4.66%) were little changed. WHERE DO WE GO FROM HERE? - Nvidia (NVDA): Bellwether results showed receivables rising faster than sales and unsold chip inventories building; also concerns about circular sales. Shares fell from an all-time high of $207 (Oct 29) to $177 at month-end. - Google: Its AI microchips emerged as cheaper and more specialized, intensifying competition. - Bitcoin: Collapsed from $125k (Oct 6) to $84k mid-month, recovering to $90k. Seen as a risk sentiment barometer amid inflation worries. - Gold: Surged to $4,239, reinforcing safe-haven demand and search for inflation hedges. - Private Credit: Stress persisted—BlackRock waived fees to offset weak loan performance, Blue Owl scrapped a fund merger after investor pushback, and loan failures continued. - Fed Outlook: Markets priced an 88% chance of a 25bp cut at the Dec 10 FOMC, though officials remain split between labor weakness vs. sticky inflation. BIG PICTURE Credit feels tight at historically snug spread levels. Tailwinds include continued Fed easing, potential yield-curve control twists, tax cuts, and deregulation that could expand bank lending. Yet bubble risks loom, leaving risk/reward stretched. Rotating into higher-quality carry, shorter duration, and sectors with tangible cash flow visibility may offer better resilience if volatility resurfaces.