key definitions
- IG spread
- extra yield on investment-grade corporates versus comparable Treasuries — a baseline for investment-grade funding stress.
- HY OAS
- option-adjusted spread on high yield — sensitive to defaults, recovery assumptions, and liquidity.
- beta to equities
- HY often correlates with small caps and cyclicals because balance-sheet leverage overlaps.
- default cycle
- the lag from spread widening to realized defaults — often quarters, sometimes years.
tight spreads can coexist with complacency; wide spreads can coexist with capitulation lows. the trick is pairing spreads with earnings revision breadth and lending standards.
policy matters: fed backstops can compress spreads without fixing medium-term default math.
early-1990s wide spreads
recession legacy left credit expensive until policy and growth stabilized.
- creditIG and HY remained cautious.
- fedeasing helped.
equities can rally while spreads are only slowly tightening.
HY OAS proxy stayed elevated versus mid-cycle norms.
FRED; ICE
late-1990s compression
reach for yield narrowed spreads until equity risk unwound.
- credittight spreads masked equity concentration.
- liquidityflows overwhelmed defaults.
skinny spreads plus equity euphoria is a fragile pair.
HY OAS fell toward cycle tights into 2000.
Fed
2001 to 2007 mid-cycle
slow repair then benign default cycle — until housing credit cracked.
- creditHY carried a carry trade bid.
- housingsubprime build.
HY calm can extend late into housing imbalances.
spreads ground tighter mid-decade.
BIS
2008 to 2009 blowout
funding froze; spreads priced depression-like outcomes.
- creditilliquidity premiums exploded.
- policyguarantees and QE.
when spreads gap faster than earnings models update, price discovery is violent.
HY OAS proxy spiked toward crisis wides.
Fed; Treasury
2010 to 2019 grind tighter
long cycle with episodic scares — energy 2015–2016, china 2015.
- creditsearch for yield dominated.
- volsuppressed until late 2018.
mid-cycle spread calm encourages equity leverage until rates bite.
HY OAS oscillated lower on average.
ICE
2020 to 2026 shocks and normalisation
pandemic spike, policy backstop, then inflation–rates–QT chapters.
- credit2020 liquidity event then repair.
- rates2022 hikes tested corporates.
spread cycles now intersect with Treasury volatility — hedging costs matter.
HY OAS whipped in 2020 then eased before a higher-rate regime.
FRED
refresh from ICE/BofAML or similar for live series — this page uses stylized levels for pedagogy.
when IG widens first, think refinancing wall; when HY leads, think cash burn and covenant stress.