U.S. Credit Spreads Ease After Widening in Weakest Debt

U.S. corporate credit spreads widened between Sept. 25 and Oct. 1, with the largest increase concentrated in CCC-and-lower debt. All three series eased on Oct. 2 but remained above their Sept. 25 readings.

ICE BofA option-adjusted spreads reported through FRED show the CCC-and-lower spread climbed from 11.28% on Sept. 25 to 12.15% on Oct. 1, an increase of 87 basis points. The broad high-yield spread rose from 2.93% to 3.24%, up 31 basis points. Investment-grade corporate spreads moved from 0.81% to 0.86%, a 5-basis-point rise. FRED’s Oct. 5 update added Oct. 2 readings of 12.02% for CCC-and-lower, 3.10% for broad high-yield and 0.85% for investment-grade.

Option-adjusted spreads measure the premium corporate bonds pay over the Treasury yield curve. A wider spread means investors require more compensation for credit risk and other bond-specific factors. An issuer’s total interest cost also depends on the level of Treasury yields.

The largest widening in CCC-and-lower debt reflects pressure at the weakest-rated issuers. CCC-and-lower debt is included in the broad high-yield index, so movements in those two series overlap. A smaller rise in investment-grade spreads indicates repricing extended beyond the lowest-rated credits.

Higher corporate credit premiums can make financing more expensive for leveraged investors and affect institutions’ portfolio choices. A 2023 working paper from the International Monetary Fund found that past episodes of monetary tightening were associated with higher capital costs and reduced leverage among crypto investors when institutions were active. The spread observations document credit repricing but do not establish a direct link to demand in specific asset markets.

The Chicago Fed National Financial Conditions Index registered -0.548 for the week ending Sept. 25, a negative reading that indicates looser-than-average conditions; that value was released Sept. 30 and predates the most recent spread moves. Market participants will watch whether spreads widen further beyond the weakest borrowers and whether broader financial conditions change.