Credit Spread Decline Supports Risk Assets, but Relief May Be Fleeting
A key measure of economic sentiment and corporate credit risk has eased from its recent multi-month highs, providing a boost to risk assets like stocks and cryptocurrencies. However, some analysts warn that this reprieve may not last.
The indicator in focus is the ICE/BofA U.S. High Yield Index Option-Adjusted Spread (OAS), which tracks the yield premium investors demand for holding high-yield corporate bonds over U.S. Treasury securities, adjusted for embedded optionality. A widening spread signals increasing investor concern over corporate defaults and economic weakness, often triggering reduced exposure to risk assets, including tech stocks and cryptocurrencies.
Recently, the OAS has narrowed to 3.2%, down from its six-month high of 3.4% earlier this month. This decline has coincided with a rebound in bitcoin (BTC) and the Nasdaq, suggesting renewed risk appetite.
The spread had surged by 100 basis points in mid-March amid concerns over President Donald Trump’s tariff policies and their potential to trigger a recession. During this period, both BTC and the Nasdaq saw significant declines, with bitcoin briefly dipping below $80K.
A Temporary Reprieve?
Despite the recent narrowing, analysts anticipate that the OAS spread may widen again as the economic effects of Trump’s tariffs become more evident, according to reports from Mint and Reuters.
“We think this is just getting started and will get worse before it gets better,” Hans Mikkelsen, managing director of credit strategy at TD Securities, noted in a client report.
Technical analysis of the OAS chart also supports this cautious outlook. The spread has broken above a three-year descending trendline, signaling a potential shift that could put further pressure on risk assets.
