Credit spreads
A credit spread is the extra yield a corporate bond pays above a comparable Treasury — compensation for default risk. The option-adjusted spread (OAS) strips out embedded options to make the comparison clean. When spreads widen, investors are repricing the odds of default; when they compress, credit is perceived as safe.
High yield vs investment grade
High-yield (junk) spreads are the sensitive end — HY issuers fail first in downturns, so HY OAS widens earliest and sharpest, typically spiking well above 5–6% in recessions versus ~3% in calm times. The BBB spread tracks investment-grade credit: broadening there means stress has left the speculative tier and entered mainstream corporate borrowing — a more serious escalation.
Why it leads
Credit markets reprice risk on expectations, not on realized losses — spreads begin widening while default rates are still low, often ahead of equity markets acknowledging the problem. In 2007–08 HY spreads began widening months before the labor market cracked; in 2015–16 they correctly flagged the oil-sector bust that never became a recession.