The Day Credit Spreads Died

August 26, 2025 | Frank Valle, CFA, CAIA, Associate Director of Fixed Income

July 31, 1997 is a date which will live in infamy. On this day, FedEx Express Flight 14 crashed at Newark International Airport, baseball slugger Mark McGwire was traded from the Oakland Athletics to the St. Louis Cardinals, and the Lehman Corporate Index hit an all-time tight of 51 basis points. While not quite at all-time tight levels, credit spreads are currently partying like it’s (almost) 1999. Specifically, the Bloomberg Corporate Index, the successor to the Lehman Corporate Index, sat at 75 basis points as of August 22, 2025, the lowest level in more than 25 years. And you may ask yourself: “Well, how did I get here?”

Tight credit spreads generally indicate that investors see less risk in the market relative to government bonds, and current spreads can be examined using a combination of macroeconomic, fundamental, and technical factors. On the macroeconomic front, tariff-related volatility in the first half of 2025 caused spreads to widen, but this widening was followed quickly by a return to lower levels given progress with trade negotiations. Additionally, a strong second quarter GDP figure and moderating inflation have provided a strong backdrop for credit. When it comes to fundamentals, credit also appears healthy. The COVID-19 pandemic gave companies the opportunity to strengthen balance sheets by terming out debt at low interest rates, while corporate earnings remain favorable. With more than 92% of S&P 500 Index constituents reporting, expectations are for EPS growth of roughly 11% for the benchmark in the second quarter (on a year-over-year basis). This figure far exceeds the consensus pre-earnings estimate of 5%. Higher coverage ratios, combined with leverage ratios that have fallen significantly since the Global Financial Crisis, creates a solid fundamental backdrop for credit. Finally, on the more technical side, strong demand for risk assets has stretched valuations, and the correlation between fund inflows and credit spreads is very high. Indeed, as most bond investors are yield buyers, higher base rates have made the fixed income space more attractive, and this dynamic has pushed spreads tighter.

In conclusion, a solid macroeconomic background, strong fundamentals, and technical factors have driven credit spreads to near historic tights. Barring an exogenous market shock, spreads may remain tight in the coming months, meaning investors should exercise caution when it comes to credit given the little room for error conditions currently provide.

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