Credit Spreads are flashing a warning sign that merits attention. We track 3 Merrill Lynch Bank of Americas Option-Adjusted Spreads, AAA, BBB and High Yield (Junk). Here we highlight the BBB spread: at 1.93% it is 78 bps above its February 2018 low of 1.15%.
Credit Spread is the extra interest demanded by investors in risky (Corporate) bonds above the interest interest earned from similar maturity U. S. Treasury bonds. Like your blood pressure, credit spread is a broad measure of systematic health. As spreads rise, the market is indicating decreasing confidence in the prospects of the credit economy. For investors, rising spreads usually means declining prices.
We published a video on credit spreads on November 30, 2018 when the BBB spread was 1.80%.