From Turbulent to Tranquil? Calm Returns to Credit Markets

April was quite the month for markets with the Treasury and corporate credit (and muni) markets experiencing elevated levels of volatility. But despite the volatility in the corporate credit markets in particular, spreads, which represent additional compensation for owning risky debt, never got to levels to suggest the economy was headed for a recession. In fact, despite the concerns over tariffs and trade wars, they still don’t.

Credit spreads are critical indicators that deserve our attention for several key reasons. First, they serve as the market's real-time assessment of corporate credit risk. When spreads widen, it signals that investors are demanding greater compensation for taking on risk, reflecting concerns about future default rates or economic conditions. Second, credit markets often prove to be leading indicators for the broader economy. Historically, significant spread widening has preceded economic downturns, as credit investors tend to be among the first to identify and price in deteriorating conditions. Finally, widening spreads directly impact funding costs for corporations. As borrowing becomes more expensive, companies may delay capital investments, reduce hiring, or postpone expansion plans, which can ultimately feed into a broader economic slowdown.

During normal economic and market conditions, investment grade (IG) spreads typically range from 80–120 basis points (bps), whereas high yield (HY) spreads typically hover between 300–400 bps. IG spreads of 150–200 bps and HY spreads of 500–600 suggest rising caution, often tied to economic slowdown, policy tightening, or sector-specific issues. And after widening sharply through April 9, credit has been stable over the past few weeks with spreads largely retracing much of the post “Liberation Day” widening.

At 352 over Treasuries, HY spreads are still only in the 29^th percentile since 2002 (meaning spreads have been higher 71% of the time). Moreover, the CCC-rated segment, which represents the companies most at risk of default, is only in the 44^th percentile relative to history. The IG market has seen similar price action with spreads widening roughly 42 bps before falling back down to around 100 over Treasuries. During the first Trump administration (excluding the COVID-19 shock), IG bonds generally traded between 110 to 140 over whereas HY bonds traded between 350 to 450 over, so the price action seen recently is only consistent with what was seen during Trump 1.0. No signs of recession or broader economic concerns in the corporate credit markets…yet.

No Concerns Here. Corporate Credit Spreads Have Tightened Recently 

Source: LPL Research, Bloomberg 05/05/25 
Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.  

But despite the relative calm emanating from the corporate credit markets, we remain cautious. Although the risk-reward trade-off for investing in corporate credit has improved slightly compared to earlier this year, and calmness has returned to the credit markets, the economic outlook remains uncertain at best. Given this, we believe spreads are still at risk of further, more sustained widening from current levels. We remain underweight investment-grade corporate credit and neutral on high yield.