Credit Spreads Are Telling a Very Different Story

• The media is sounding the alarm on rising corporate borrowing costs.

• Speculators have doubled down on bearish S&P 500 bets.

• AAA, BBB, and HY credit spreads remain near five-year lows.

Another week, another warning that falls apart the moment you look under the hood…

The financial media never misses a chance to resurrect a bearish storyline, even when the data refuses to cooperate. Lately, they’ve latched onto the idea that rising borrowing costs and “tightening” credit conditions are about to choke off the economy and send the stock market spiraling lower. It’s a compelling headline, but it’s built on selective readings of the credit markets rather than the full picture. The narrative is familiar: a pessimistic tone, dramatic framing, and the implication that trouble is supposedly right around the corner.

As a result, speculators are leaning back into the downside narrative. According to the Commodity Futures Trading Commission, short interest in the S&P 500 Index has widened back out to levels last seen in late 2023. In fact, the negative wagers have more than doubled since the end of last year…

It’s a classic divergence: sentiment is sour, but the mechanics of the credit market aren’t confirming the fear. Because when you look at the data, credit spreads are telling a different story. Borrowing costs, as measured through ICE BofA’s option‑adjusted spreads, remain near some of the lowest levels we’ve seen in years.

That’s not what a stressed financial system looks like. Tight spreads mean lenders are comfortable, balance sheets look sturdy, and the probability of getting paid back is high. That backdrop supports a steady rally in the S&P 500 Index, not the reversal the media keeps warning about.

But don’t take my word for it, let’s look at what the data’s telling us…

If you want to know where growth, risk appetite, and financial conditions are heading, you watch credit spreads. They’re Wall Street’s cleanest read on underlying risk because they strip out the noise embedded in Treasury yields.

You see, Treasurys move for all kinds of reasons, like issuance waves, foreign demand, pension rebalancing, and Fed signaling. But credit spreads move for one reason: investors reassessing the probability of getting paid back. Shrinking spreads tell us corporate balance sheets look solid, cash flows feel safe, and lenders are willing to warehouse more risk. On the other hand, widening spreads indicate the cost of trust is rising, and financial conditions are tightening.

But they tend to lead market and economic cycles. Credit spreads turn before earnings revisions, before PMIs, and often before the Fed acknowledges a shift in the real economy. They’re the first place that stress shows up when liquidity thins or confidence cracks. In other words, spreads anchor the true cost of capital for corporate America.

The easiest way to follow credit spreads is through ICE BofA’s family of OAS‑based indexes. They give you a real‑time read on how each layer of corporate credit is being priced relative to Treasurys. They’re built on consistent rules, duration‑matched to the curve, and scrubbed for callability noise. So, when the spreads move, you know you’re seeing a true shift in credit risk, not a distortion from structure or liquidity.

The indexes are broken down into three quality tiers: AAA, BBB, and High Yield. Watching all three together gives you a full cycle dashboard: AAA for macro liquidity, BBB for corporate funding pressure, and High Yield for credit stress. When they move in unison, the economy tends to be strong. But when they diverge, it can be a signal of trouble ahead.

Right now, all three metrics are indicating a normal operating environment…

AAA spreads tell you when the safest corporate balance sheets are being repriced. That’s usually a sign of broad, systemic shifts in liquidity or risk appetite. The current gap relative to Treasurys is 37 basis points. Now, that has risen a bit lately but it’s still hovering around one of the lowest levels we’ve seen in the last five years…

BBB spreads sit at the edge of investment grade, so they’re the canary for refinancing stress: when BBBs widen, it means the marginal borrower is losing access to cheap capital, and the real economy will feel it next. The current 79 basis point spread is also at one of the lowest levels since 2020…

Last but not least, High Yield spreads are the stress gauge. They widen when default risk is rising, when lenders are pulling back, or when cash flows can’t support leverage. Right now, those spreads relative to Treasurys are 288 basis points. That’s far below the recent peak of 487 basis points from last April and just above the trough set in January 2025…

At the end of the day, credit spreads remaining this low contradicts the negative storyline dominating the headlines. Those spreads tell us borrowing costs are stable, liquidity is intact, and the system is functioning smoothly. And if they stay anchored while speculators stay short, the pressure won’t be on the market — it’ll be on the bears. Eventually, they’ll have to cover their negative bets, underpinning a steady rally in the S&P 500 Index.

Five Stories Moving the Market:

German Finance Minister Lars Klingbeil said Germany sees no need to revise its stance on common European debt, backing Chancellor Friedrich Merz in opposing recent calls for more joint borrowing – Bloomberg. (Why you should care – the comments point to the core differences in fiscal priorities between the European Union’s hawkish northern and dovish southern legislatures)

U.S. and Iranian negotiators are expected to meet in Geneva on Thursday to discuss a detailed Iranian proposal for a nuclear deal; the White House expects to receive the proposal by Tuesday, according to senior officials – AXIOS. (Why you should care – this may be the last chance for diplomacy before the U.S. initiates military action against Iran)

President Donald Trump rushed to salvage his signature tariffs after the Supreme Court struck down his global duties, saying he would impose a flat 15% levy on foreign goods, and that he would order a raft of trade investigations that should allow him to enact more permanent tariffs – Bloomberg. (Why you should care – the flat tariff would be lower than current levels, easing the associated price pressures)

OpenAI is targeting roughly $600 billion in total compute spend through 2030, as the ChatGPT maker lays groundwork for an IPO that could value it at up to $1 trillion; OpenAI's 2025 revenue is said to have totaled $13 billion, beating its $10 billion projection, while it spent $8 billion during the year, under its $9 billion target – Reuters. (Why you should care - OpenAI is said to expect more than $280 billion in total revenue by 2030, divided nearly equally across its consumer and enterprise units)

U.S. economic growth slowed sharply at the end of last year, weighed down by the government shutdown and cooler consumer spending; gross domestic product rose at a 1.4% seasonally adjusted annual rate in the final quarter of last year, according to the Commerce Department – WSJ. (Why you should care – below trend economic growth would support the case for additional rate cuts by the Federal Reserve)

Economic Calendar:

Earnings: BMRN, D, DPZ, FANG, GNW, OKE, VNOM

Markets closed in China and Japan

Germany – Ifo Business Climate Index for February (4 a.m.)

Fed’s Waller (Board Member, Voter) Speaks (8 a.m.)

U.S. – Factory and Durable Goods Orders for December (10 a.m.)

U.S. – Dallas Fed Manufacturing Business Index for February (10:30 a.m.)

Treasury Auctions $89 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $77 Billion in 26-Week Bills (11:30 a.m.)

ECB’s Lagarde (President) Speaks (12:30 p.m.)