Credit Markets: Cone of Silence Ahead? 9-29-25

Another uneventful week for spreads as the market braces for shutdown risks and questions on economic release availability.

Sep 29, 2025

Max, did you say negative payroll?

The market is gearing up for payroll data and what that means for FOMC handicapping and cyclical conditions, but the shutdown would put that on hold. As we have already discussed, mass layoff threats in Washington from the OMB head (Vought) could also be part of a more immediate overhaul of the data providers as sought by Project 2025 (see The Curve: Easing Anxiety at Bat, Tariffs on Deck 9-28-25, Mini Market Lookback: Market Compartmentalization, Political Chaos 9-27-25).
The past week in spreads was quiet even if IG and HY moved slightly wider with equity benchmarks in the red, an adverse move in the UST curve undermining bonds, and some noise out of private credit with a heavy auto flavor and signs of subprime consumer stress (see Market Commentary: Asset Returns 9-28-25).
The absolute levels of spreads remain in the 1997 zone for IG at +75 bps and the June 2007 range for HY at +275 bps. The 1997 period moved into pockets of extreme volatility in 1998 and a default cycle was underway in late 1999 even with NASDAQ rocking. The June 2007 period gave way to suspended animation in the summer of 2007 and burgeoning crises at brokers (Bear management turnover) with hedge funds starting to crack (early subprime meltdowns).
We don’t see any material parallels in 2025 to 2007 in current markets other than the tight spreads. The financial system is healthy in 2025, and cyclical trends are much more diverse and only under modest pressure. We also have a much healthier pool of “bubblish” tech bellwethers vs. the very dicey TMT quality seen in the late 1990s. Corrections happen multiple times across cycles, and we see an ample supply bear markets (20% sell-off) or near-bear markets in most cycles in various indexes and subsectors as the stock market historians often recount (see 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25).
Risk repricing is different than an impending recession, which we do not see as a threat now and had not seen as a threat back in 2022 even with legitimate worries to expect one. In our view, you need negative payrolls and collapsing PCE to wave the recession flag. Repricing of risk is the usual market challenge, and that symmetry is negative from such tight spread starting points (see Macro Menu: There is More Than “Recession” to Consider 8-5-25 , Unemployment, Recessions, and the Potter Stewart Rule 10-7-22).

The above chart updates the 1-week and trailing 1-month spread deltas for IG and HY and from the BBB to CCC tiers. The risk pricing action on the week was modestly unfavorable for both IG and HY with slight widening across the tiers. The 1-month spreads show a modest tightening for IG and HY but with the CCC tier showing its usual volatility that can be tied to constituent moves (dropouts and drop-ins) with that smaller credit tier more easily wagged by a small number of stressed names. The real action in CCC caliber exposures is over in private credit.

The above chart updates the YTD 2025 excess returns and total returns across IG and HY and the credit tiers. The support of the UST curve and spread compression is clearly reflected in the returns with the BB tier still the best positioned of the lot in the balance of credit risk and duration risk. The YTD excess returns are down sequentially (and mostly) from last week.

The BB tier maintained its lead this week for YTD excess returns with the CCC tier slightly behind followed by the B tier. Credit has been delivering positive trends, but one can make an easy case that the risk compensation has played out more favorably in BBs for the risks being taken.

The CCC tier with its mix of coupons and shorter duration has framed up well in the bar chart, but that begs the question of how much better the excess returns in the CCC and weak B range should be given the magnitude of the risks relative to the BBB and BB tiers. The risk-adjusted debate tends to get obscured by the discussion of what is the right metric to make that assessment. The BB tier is still the winner YTD by any measure vs. B and CCC.

The above updates the multi-cycle spread history for IG as we see the wild swings across time when the banks were in harm’s way in 2008 and the heavy exposure to energy names whipsawed BBB energy in 2015 and early 2016.

The current +75 bps remains below the tights of late 2024. IG spreads are below the March 2005 levels just before the auto OEMs started taking a lot of heat with a GM warning in mid-March 2005. There is no getting around the reality that IG spreads rarely get this low, but there is plenty of history where they were lower in the late 1990s.

As mentioned in the bullets, the record lows since 1997 were seen in early Oct 1997 when that year saw a protracted stretch of 60-handle spreads. The market spent time in 1998 in the mid-70s range including the early summer. Life got ugly starting in Aug 1998.

That 1997 low of +53 bps came just before the Asian Yankee bond market started to implode, and the broader regional Asian crisis unfolded. Spreads in 1998 kicked into a correlated beatdown after the Russia default in Aug 1998 and did damage to other markets as a contagion effect hitting EM credit and US HY valuations. That was the summer and fall of LTCM after the Russian default of Aug 1998. Lehman also saw a mini-panic and funding crunch in the fall of 1998 that they got past quickly. CDS exposure and counterparty risk saw fleeting focus at the time.

Banks and financial services still an anchor today…

Critical drivers of IG spreads are always the banks and financials broadly at over ¼ of face value, and the major banks are very sound at this point compared to past recession periods such as Dec 2007 to June 2009, which was an epic meltdown for the banks and brokers. The securities firms ended up merging (BofA+ML) or essentially getting sold off in pieces (Lehman) or converting to Bank Holding Companies (Goldman, Morgan Stanley). The days of commercial paper funding of securities firms have given way to deposits, so there is also much less funding risk in the system.

The TMT bubble years of 2000-2002 is the stuff of legend. Earlier, the infamous 1980s LBO reckoning and the commercial real estate stress of 1990-1993 came not long after the thrift crisis and oil patch collapse slammed many banks and S&Ls.

The COVID crisis was a very different beast, but the market benefited from a well-positioned Fed with a crisis-period toolbox to pull out. How the Fed will be governed or legislated under the shadow Project 2025 priorities (see Chapter 21 and 24) will be a critical variable into 2026 when the new team is in place. What Trump wants to do with his loyalists at the helm is unclear except for the 300 bps (now 275?) in cuts he demanded and most definitely will not receive without a massive crisis in the markets (which would not bode well for his “clout”).

The sub-300 bps HY OAS returned after the Liberation Day panic eased. The +275 bps is inside the month-end spreads of June 2007 even if wide to the HY OAS tights seen at the start of June 2007 (+241 bps). We also saw +244 bps in Oct 1997 for another Clinton memory lane moment to go along with the IG spreads hitting +53 bps in Oct 1997. The HY index today is higher quality and much more diverse than the TMT wave of the late 1990s.

Today’s HY market presents a much healthier credit mix than in June 2007 when LBOs had gone off the charts and were partly funded with HY bonds. In the current market, those highly leveraged transactions have migrated over to private credit. That still means the +241 bps of early June 2007 is like a brass ring to HY funds today. The HY bond index default cycle is very much in check. The distress and debt exchange actions will be weighed more heavily (and quietly) over in private credit as the year plays out.

The “HY OAS minus IG OAS” quality spread differential of +200 bps is above the tights of +178 bps seen in Jan 2025 and materially higher than the +147 bps in June 2007. The +200 is more in line with credit cycle mini-peaks such as June 2014, Oct 2018, and Dec 2021.

We see the peak of +341 bps after Liberation Day vs. a long-term median of +322 bps. Most of the cyclical timeline medians noted in the box had 300-handles, so this trend overall highlights that quality spreads are offering low compensation for moving down the credit tiers.

The “BB OAS minus BBB OAS” quality spread differential is back in double digits after spiking to +158 bps after Liberation Day. The long-term median of +133 bps is consistent with the median across the credit cycles detailed in the box.

The current cycle has routinely hit “lower lows” than the current +77 bps with 50-handles seen at numerous points. The record low tick was June 2007 at +53 bps. The market has come close on numerous occasions from 2019 to 2024.

The above plots the time series for the BB tier across the cycles. The current sub-200 bps level of +172 bps is impressively tight and started chasing the Nov 2024 lows of +157 bps. The long-term median of +295 bps is in a different zip code.

The demand for BB tier bonds has seen BBB buyers, HY lite strategies, and defensive HY funds all looking to this tier that ranks as by far the largest in HY. The strategy has worked as we covered earlier in excess and total returns across the tiers. The BB tier has been a good way to take credit risk while managing duration exposure and still carrying a respectable coupon.

The B tier is the sweet spot and home of the “HY Classic” investor. We see the current level at +284 bps back inside the +300 bps line. B tier OAS had reached a post-2007 low of +254 bps in Nov 2024 before the Liberation Day fallout in April 2025 drove the B tier OAS to +486 bps. The long-term median stands at +463 bps.

This current cycle’s median at +396 bps is the lowest of the mini-cycle medians presented in the chart. It is well below the mid to high 400 handles seen in most with the exception of the post-crisis (Dec 2007 to Feb 2020) median which crossed above the 500 range to +508 bps. The March 2001 to Dec 2007 (start of recession) median was just under +400 bps at +397 bps when the period from 1H04 to 1H07 pushed that timeline median lower.

The above time series plots the wildest ride across the cycles seen in the B and CCC OAS levels. Both credit tiers are dramatically below their long-term medians. The B tier at +284 bps is well inside the median of +463 bps while the CCC tier at +801 bps is well below the median of +948 bps.

The post-crisis spread spike in Dec 2008 is ranked in a world of its own given the bundle of risks including a collapse of some market makers (and near collapse of others without Fed-engineered mergers) as well as evaporating secondary liquidity in the OTC HY bond market.

The TMT cycle default wave and secondary liquidity implosion saw multiple spread peaks in 2001 and 2002 that were especially ugly. Enron came in the fall of 2001 and WorldCom in the summer of 2002. IG spreads and BBB tier names also saw selective panic in the summer of 2002.

The sovereign panic of fall 2011 is in evidence as was the overexposure and E&P excess of 2015 to early 2016 on the collapse of oil and gas as the cash flow burn and valuation crisis dominated the upstream sector.

COVID saw a wave of supportive monetary policy and fiscal actions, so the energy sector HY crisis peak OAS in early 2016 was wider in spreads than those seen at the 3-23-20 COVID highs. In the case of the energy crisis, a major cross-section of the HY universe was driven by the same small group of risk factors in oil and gas prices and the recurring story of a collapsing borrowing base with the banks.

During COVID, the return to ZIRP and the “great reopening” of the economy and markets bolstered risk appetites and generated record refinancing and extension volume. In turn, that materially reduced refinancing risk (thus default risk) and lowered coupon costs from IG to HY. Household cash flow was also boosted on mortgage refinancing to record lows.

The ZIRP backdrop also eased ABS costs and bank line costs. Under some of the Fed legislation and control moves being discussed in the current market, that support seen in earlier credit panics would not have happened. If the Fed loses such tools, that would mean the White House would pick winners and losers (i.e. friends vs. enemies). Control of the Fed would offer the White House vastly more financial power than it has now to “influence” (intimidate? control?) borrowers and lenders alike.

The above offers a more granular visual of the B vs. CCC OAS since the start of 2022 to get a read on how credit pricing moved across the tightening cycle on the way to easing mode.

The Russian invasion of Ukraine and resulting dislocation in energy markets was a major contributor to inflation that seldom gets mentioned in the political arena or by more partisan economists. Oil and gas prices were also major factors in the mix of 1973-1975 and 1979-1981 inflationary/stagflationary periods.

In the end, there was no recession in 2022 and no ugly default wave. Inflation and rates came down quickly from the June 2022 peaks. CCC spreads peaked in Sept 2022 and B tier spreads in early July 2022. Many of the talking heads have selective memories and seem to forget that headline CPI was 2.9% in Dec 2024.

Progress in 2025 through August on CPI has been essentially nonexistent at this point from early 2025 progress. The noisemakers should ask themselves how inflation went so high by June 2022 and then came down so quickly.

What we seldom hear mentioned is the Russian invasion of Ukraine and the energy shock. The supply-demand imbalances of 2021 should have been on the radar screen and a bigger priority for the Fed, but the absence of discussion of Russia and oil/gas smacks of selective performance attribution and is both misleading and intellectually dishonest.

The above quality spread differential for B vs. CCC tells a simple story. In times of macro stress, HY secondary liquidity panics (fear of fund redemption waves, etc.) and quality shocks where the HY index has industry concentrations (e.g. TMT, Energy), the CCC tier quickly sees credit risk turn into the equivalent of equity risk and even high-risk equities. That means bond pricing is expected to offer returns commensurate with that status. That is when the action is about dollar prices and not spreads.

Trying to gauge the credit risk, the default risk, the loss-given-default pricing component, the secondary liquidity penalty, the structural risks of the governing documents, and the recovery value and time horizon risks (30 days on CDS, post workout value upon emergence, etc.) is where the distressed debt commandos and seasoned vets come in.

The quantitative modeling of defaults can sometimes take on the nature of “weird science” or “fake science” while the classic distressed investor typically has the experience and legal inputs to navigate such markets. Assumptions can always be wrong, but there are histories and templates that those players tap into.

The above chart just shortens up the time horizon for the B vs. CCC quality spread differential history for the period from Jan 2022 through current times to capture the tightening cycle, the start of easing, and the new world of tariffs.

We see peak quality spread differentials at +741 bps in Nov 2022, up from +315 bps at Jan 2022. We are currently at +517 bps, above the long-term median of +486 bps. As a reminder, many market watchers were screaming recession in the fall of 2022. We did not see it that way (see Unemployment, Recessions, and the Potter Stewart Rule 10-7-22).

Cyclical turning points? 2022 vs. today…

There was plenty to worry about back in 2022 and Russia-Ukraine was not helping on the front of cyclical optimism with an energy price spike. However, consumer spending was still solid, and employment was strong. The yield curve was of course a mess. That said, it takes a lot to cause a recession.

In the current market and the recession debate, we see a mixed picture. The fall of 2022 lacked serious payroll pressures, and we are seeing those now. We will see if that data flow gets choked off in a shutdown or radically reduced by a new BLS head who will essentially cater to White House demands.

PCE and consumer spending was rolling along impressively in the fall of 2022. That has been under pressure of late with PCE lines in the GDP account weak in 1Q25 and 2Q25 even after the sharp upward revision in the final estimate for 2Q25 (see 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25). We are seeing some decent retail sales numbers along the way, and the latest PCE release on income and outlays was more constructive (see PCE August 2025: Very Slow Fuse 9-26-25).

PCE inflation numbers remain well above target while CPI posted some warm numbers for August, but PPI offered some offsets (see CPI August 2025: Slow Burn or Fleeting Adjustment? 9-11-25, PPI Aug 2025: For my next trick… 9-10-25). After the tariff legal decision on IEEPA, we believe economic risks will be lower if that Appeals Court decision can hold up against the SCOTUS “friends of Trump” (see Macro Menu: There is More Than “Recession” to Consider 8-5-25). The decision is expected in November.

Last but not least, we saw solid earnings trends coming out of 2Q25 with constructive guidance. That could change in 3Q25 as the mix of factors and advancing stage of tariff effects get more weight. We also just saw a fresh wave of tariffs this past week. We will soon be in 3Q25 earnings season with fresh color on tariffs and tariff cost mitigation strategies.

The questions around capex planning for 2026 will be interesting to the extent they even get answered this early. That might be a 4Q25 earnings guidance discussion. For those most exposed to tariffs and global sourcing, the IEEPA decision is critical. That will not be available except for (maybe) the late earnings reports. That decision will be available for the later retailer reporting season.

For now, the recession risk handicapping is a pitched battle. The mix of variables are worse in the fall of 2025 than 2022 with the exception of inflation (lower now). Short interest rates are lower now and heading lower. Jobs and consumer spending and corporate sector reinvestment and hiring are the main events, and labor will remain a weak part of the cyclical story. Consumer spending in the PCE lines of GDP is weaker now than in 2022 (and 2024) as is the employment picture. The small business sector is also weaker now on tariffs.

All in, risk premiums in credit are low, multiples are very high in equities, and the market is relying on Washington to not blow it all up. So far, we have avoided fully unhinged trade wars except a very brief one with China. Presumably, the shutdown will not do too much damage, or the market will need to react. If the shutdown brings a mass overhaul of economic data releases (BLS and BEA), then the market will know that there is serious trouble ahead for Fed independence.

Market Commentary: Asset Returns 9-28-25

Mini Market Lookback: Market Compartmentalization, Political Chaos 9-27-25

PCE August 2025: Very Slow Fuse 9-26-25

Durable Goods Aug 2025: Core Demand Stays Steady 9-25-25

2Q25 GDP Final Estimate: Big Upward Revision 9-25-25

New Homes Sales Aug 2025: Surprise Bounce, Revisions Ahead? 9-25-25

Credit Markets: IG Spreads Back in the Clinton Zone 9-22-25

The Curve: FOMC Takes the Slow Road 9-21-25

Market Commentary: Asset Returns 9-21-25

Mini Market Lookback: Easy Street 9-20-25

FOMC: Curve Scenarios Take Wing, Steepen for Now 9-17-25

Home Starts August 2025: Bad News for Starts 9-17-25