What is a credit spread?

A credit spread is the extra yield investors demand to lend to corporations versus the US government, expressed in percentage points above Treasuries. Wider spreads = more perceived risk. Tighter spreads = more market confidence.

What is the difference between IG and high yield?

Investment Grade (IG) refers to corporate bonds rated BBB- or higher by major rating agencies. High Yield (HY, also called junk) refers to bonds rated BB+ or lower. IG borrowers pay tighter spreads; HY borrowers pay wider spreads to compensate for higher default risk.

What does CCC divergence mean?

CCC divergence is when the spreads on the lowest-rated junk bonds (CCC) widen significantly while higher-rated tiers (IG, BB) stay calm. It's a classic late-cycle pattern — the weakest borrowers feel stress first, often months before broader credit markets crack. Lighthouse tracks this as an early-warning signal.

How do credit spreads predict recessions?

Credit spreads tend to widen weeks or months before equity markets crack and central banks respond. The bond market is structurally more risk-aware than equities because corporate bondholders care primarily about being repaid, not about upside. When credit gets nervous, it gets nervous first.

// LIGHTHOUSE · CREDIT STRESS

Credit Stress, Today

Live corporate credit spreads across rating tiers — the bond market's view of risk in real time. With historical context and what each pattern signals.

Current tier readings

Each tier shows the option-adjusted spread (OAS) — extra yield above Treasuries — for that rating bucket. Tighter spreads = market confidence. Wider spreads = stress. Updated daily from FRED.

Investment Grade

0.86%

45th percentile — middle of the historical range for top-grade credit.

HY OAS (broad junk)

3.24%

65th percentile — middle of the normal range.

BB (top junk tier)

2.04%

69th percentile — elevated — strong junk repricing.

Single-B

3.29%

65th percentile — middle of normal range.

CCC ⚠

12.15%

100th percentile — stressed — weakest borrowers repricing hard; classic late-cycle divergence.

Pattern in plain English

Investment Grade and BB borrowers are paying the tightest spreads in years — the market sees almost no risk for safer credits. But the lowest-rated junk (CCC) is materially elevated. This is credit tier divergence — a classic late-cycle pattern where the weakest borrowers feel stress first, often months before broader markets crack.

High Yield OAS — the broad junk-bond view

The single cleanest measure of credit market stress. Spikes correspond to recessions and credit crises. Peaked at 19.88% on Dec 16, 2008 (GFC) and 10.87% on Mar 23, 2020 (COVID).

FRED:BAMLH0A0HYM2 · Weekly · Going back as far as data allows

Data: ICE BofA US High Yield Index Option-Adjusted Spread, via FRED.

CCC tier — the canary

The lowest-rated junk bonds. When the bond market starts pricing in real default risk, it shows up here first. Watch this chart relative to the HY OAS above — when CCC diverges higher while HY stays compressed, the canary is chirping.

FRED:BAMLH0A3HYC · Weekly

Data: ICE BofA CCC & Lower US High Yield Index Option-Adjusted Spread, via FRED.

Investment Grade — for reference

The safest end of the corporate credit market. Compare to the charts above — IG stays remarkably compressed even as CCC starts to flash. That divergence is the story.

FRED:BAMLC0A0CM · Weekly

Data: ICE BofA US Corporate Index Option-Adjusted Spread, via FRED.

How to read this

Credit goes first. The bond market has weeks-to-months of warning ahead of equity markets and central banks. Corporate bondholders care primarily about being repaid — they don't get to participate in upside. So when they start demanding more compensation to lend, it means the underlying risk picture is shifting before stock prices have caught up.

The tiers tell different stories. Investment Grade reflects how the safest credits are perceived. CCC reflects how the most marginal borrowers are perceived. In a healthy expansion, all tiers compress together. In a late-cycle environment, the tiers separate — CCC widens while IG stays calm. That gap is the warning.

The current pattern. Lighthouse's dashboard reads COMPRESSED at the composite level (63/100). Tier readings are mixed with no clean divergence — CCC at the 100th percentile, BB at the 69th. Neither the calm story nor the warning story dominates yet; watch which one develops.

What to watch alongside spreads. Consumer credit conditions (delinquency rates on cards, auto loans, student loans) often crack before corporate credit catches up. Consumer delinquencies entered 2026 near 15-year highs — and corporate credit is now repricing as well; the two sides are no longer diverging.

Read the full article →

A 12-minute plain-English deep dive on what credit spreads are, why they predict recessions, and how to read them.