Hard To Imagine Credit Spreads Getting Much Tighter From Here

Calling Bottoms Only Thing Tougher Than Spreads Getting Narrower

December 27th, 2024 - Volume 10 (2024), Missive 268 (Friday)

• Credit spreads closed the gap which can signal transition

• Financial corporate debt issuance looks to expand

• Private equity behind the push

Credit spreads never get enough attention but for very good reasons. First of all, the information itself is hard to come by. Secondly, once found, the information is suspect, at least with respect to actual values. Finally, though, is the fact that indexes themselves are varied and, subsequently, rely on secondary information themselves - typically through pricing services that may or may not accurately reflect what can be volatile market yields. Nevertheless, a decent amount of insight can be cobbled together by taking a longer-term view of the behavior of the indexes. In this case, the seasoned corporate bond indexes highlighted below indicate that credit spreads will have a hard time getting much more narrower from here and the economic factors that tend to influence them seem to agree.

Not calling a bottom per se, but man is it going to get tougher for credit spreads to tightening from here.

Many factors will add up to influence the overall size and shape of credit spreads from one day to the next. Of course, daily changes in the corresponding yields in the Treasury market (in the case of the graphs, the 10yr U.S. Treasury Note) will unduly impact the spread from one moment to the next. However, the economics of the aggregate price level and the viability of any business to transform enough potential output into kinetic GDP will play a much larger role over the long-term. This is why the spreads tends to narrow during productive times and widen out when things slowdown in the economy. Issuance also plays a big part especially when