Credit markets might be too positive – possibly good window for issuers and investors

Credit spreads close to 25-year lows

Credit markets are highly positive – with credit spreads at close to 25-year lows.

From investment-grade to high-yield

Investment grade spreads are exceptionally tight – at 0.7% (ICE BofA US Corporate Index OAS). This is half of its level three years ago.

High yield spreads are also exceptionally tight – at 2.6% (ICE BofA US HY OAS). For comparison, this level was in the 4% to 5% range for much of 2022 and 2023.

Both of these are close to 25-year lows.

May be an excellent opportunity for issuers and investors

This may provide an exceptionally good opportunity to issuers to lock in debt funding, and for investors to take profits/protect their portfolios from large-swing downside scenarios.

Risk might be asymmetric

The risk may be asymmetric – there is a limit to how low spreads can go, but there are a wide range of factors that could make spreads move much wider.

Markets can stay rangebound for long periods

Spreads can stay rangebound for long periods – so this does not mean that spreads will increase soon – just that the risk may be asymmetric.

Risk categories

Risks include a re-escalation of the Iran war – and a resulting increase in oil prices, inflation data starting to increase/accelerate, a more hawkish tone from the Fed, growing public or private credit defaults/issues, concerns of an AI-stock market bubble, unexpected policy changes ahead of elections, market indigestion from high levels of new issuance from hyperscalers, and general wildcard risks.

Potential for upside, but magnitude of move could be asymmetric

There are of course factors that could be market positive – but the point here is that the upside/downside might be highly asymmetric for issuers and investors here because of how tight spreads already are.