Milan Cacic
May 30, 2025
Money Financial literacy Economy Commentary Trending Weekly update Weekly commentaryCREDIT SPREADS... WHY THEY MATTER
We seem to be getting more phone calls about Trump and his tariff policies creating an economic downturn. There is no doubt that Trump creates volatility, however, if we want to get a glimpse of what might happen in the future with regard to the economy, we don't have to look much further than credit spreads.
Credit spreads are the difference in yield between corporate bonds and comparable Treasury securities. They are a critical indicator of economic health. When credit spreads widen, it signals that investors are demanding higher yields to compensate for the perceived risk of corporate debt, often reflecting concerns about economic stability or corporate profitability. A widening spread typically indicates growing unease in the market, as investors anticipate higher default risks or a slowing economy. This can be a bearish signal for equities, as tighter financial conditions may pressure corporate earnings and stock valuations. Historical data shows that significant widenings in high-yield credit spreads, such as those seen in 2008 or 2020, often precede economic downturns and market volatility.
Conversely, narrowing credit spreads suggest improving investor confidence and a more robust economic outlook, which can support stock market gains. Monitoring spreads, such as those between Baa-rated corporate bonds and 10-year Treasuries, helps us gauge market sentiment and adjust our portfolio strategy accordingly. While current spreads remain low compared to historical crisis levels, we have seen some recent widening. Any sustained widening warrants close attention, as it could signal challenges ahead for both the economy and equity markets. As you can see from the chart below, the credit spreads are telling us that there is likely no significant downturn in the economy coming, at least in the short term. We will continue to track these indicators to ensure our portfolios are allocated appropriately.
I have also attached some commentary from our CIBC Economics team entitled “Another shoe to drop?”.
As always, if you have any questions, please feel free to give us a call.
Have a great weekend.
Milan