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How to read credit spreads
Credit spreads measure the extra yield investors demand to hold corporate debt over Treasuries. HY OAS (high yield option-adjusted spread) is the most-watched cyclical indicator: tight spreads = risk-on, widening spreads = risk-off. The signal that matters is the rate of change, not the level. A 50bp widening in two weeks is a regime shift. A 50bp widening over six months is normal cycle drift. Spreads usually move before equities at major turning points.
- HY OAS
- High-yield spread vs Treasuries. Cyclical indicator.
- IG spread
- Investment-grade spread. Less noisy, slower-moving.
- Rate of change
- Direction and speed matter more than absolute level.
- Cross-check with vol
- HY OAS and VIX usually agree at turning points.
What spreads measure
- HY OAS - average extra yield on high-yield (BB and below) bonds vs comparable Treasuries
- IG spread - same for investment-grade
- CDX HY/IG - derivative versions, useful for intraday tracking
Reading the signal
Tight and stable: risk-on. Equities can run.
Widening: risk-off building. The pace matters - 25bp in a week is cycle drift; 50bp in a week is stress.
Spike: crisis pricing. Usually coincides with equity drawdowns and vol spikes.
Compressing from highs: recovery. Usually leads equity rallies by weeks.
When spreads disagree with equities
If equities rally but HY OAS widens, distrust the rally. Credit usually wins the disagreement at major turning points (2007, 2018, 2020, 2022).