Why Credit Spreads Keep Saying “All Clear”

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

• Speculators have boosted S&P 500 short bets.

• AAA, BBB, and HY credit spreads are near cycle 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. This time it’s stagflation and “tightening” credit conditions supposedly choking off the economy and setting the stock market up for a fall. It’s a dramatic headline, but its primary driver, higher oil prices, is already breaking down. The narrative is familiar: pessimistic tone, theatrical framing, and the implication that trouble is always just around the corner.

As a result, speculators have leaned into the downside story. According to the Commodity Futures Trading Commission, short interest in the S&P 500 Index has jumped to levels last seen in mid-2023, when the Fed was rapidly raising interest rates…

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

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. 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 take more risk.

• Widening spreads indicate the cost of trust is rising, and financial conditions are tightening.

Credit spreads also tend to lead market and economic cycles. They turn before…

• Earnings revisions

• Purchasing Managers’ Index shifts

• 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 cleanest way to follow them is through ICE BofA’s family of OAS‑based indexes. They’re duration‑matched to the curve, scrubbed for callability noise, and built on consistent rules. When they move, you’re seeing a real shift in credit risk, not a distortion from structure or liquidity.

The indexes break into three tiers: AAA, BBB, and High Yield. Together, they form 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 is usually strong. When they diverge, it’s a warning.

Right now, all three metrics are near the cycle lows, indicating a normal operating environment…

AAA spreads show how the safest balance sheets are being repriced.

• The current gap relative to Treasurys is 33 basis points.

• It has been steadily easing since mid-March.

• It’s close to the lowest levels we’ve seen in the last five years.

BBB spreads sit at the edge of investment grade, 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 spread is 79 basis points.

• It has also been dropping since mid-March.

• And it’s just above 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.

• Those spreads relative to Treasurys are 288 basis points.

• That’s well below the recent peak of 342 basis points.

• It’s just above the 259 basis point trough set in January 2025.

At the end of the day, credit spreads this low contradict the stagflation storyline. They tell us borrowing costs are stable, liquidity is intact, and the system is functioning smoothly. And if spreads 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, fueling a steady rally in the S&P 500 Index.

Five Stories Moving the Market:

As European leaders gather with U.S. President Donald Trump in person this week for the first time since the start of the Iran war, their goal will be to avoid any fight; Trump’s blowups with allies over Iran and Greenland have scarred European leaders so badly that many wonder whether they can still reason with him – WSJ. (Why you should care – Europe’s leaders are trying to walk a fine line between striking a tough stance while encouraging U.S. military support)

U.S. President Donald Trump said he would now turn his attention to trying to secure peace between Ukraine and Russia with an Iran peace deal now secured; Trump is due to attend a working session with Ukrainian President Volodymyr Zelenskiy at the summit, whose hand has improved since the two last met – Reuters. (Why you should care – a deal between Russia and Ukraine could potentially free up more energy resources, weighing on global prices and inflation growth) 

Chipmaking giant Nvidia sold $25 billion of high-grade bonds, joining a wave of jumbo debt offerings from tech heavyweights as investors clamor to get exposure to the artificial intelligence boom; the company is said to have sold notes in seven parts with maturities ranging from two to 30 years – Bloomberg. (Why you should care – investment grade credit spreads are hovering near their lowest levels in the last five years)

Stocks of crude oil in the U.S. Strategic Petroleum Reserve fell to 340.3 million barrels, the lowest level since 1983, ​according to data from the Department of Energy; inventories in the government's emergency stash fell by 8.9 million ​barrels, the third steepest draw on record – Reuters. (Why you should care – it would require about three days’ worth of global production to refill the SPR to capacity)

Bundesbank President Joachim Nagel said the jump in energy prices from the Middle East conflict will continue to be felt despite a deal between Iran and the U.S. to end the fighting; Nagel believes it will take months for oil prices to return to pre-war levels – WSJ. (Why you should care – Nagel, a monetary policy hawk, is worried that the second-round effects on inflation growth can’t be overlooked)

Economic Calendar:

Earnings: LZB, WLY

Reserve Bank of Australia Monetary Policy Announcement (12:30 a.m.)

BOJ's Ueda Speaks (2:30 a.m.)

Eurozone - ZEW Economic Sentiment for June (5 a.m.)

U.S. - ADP Employment Change Weekly (8:15 a.m.)

U.S. - Building Permits for May (8:30 a.m.)

U.S. - Export, Import Price Index for May (8:30 a.m.)

U.S. - Housing Starts for May (8:30 a.m.)

Treasury Auctions $65 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $13 Billion in 20-Year Bonds (1 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

Japan - Exports, Imports for May (7:50 p.m.)