Risk for a widening U.S. High Yield OAS

Credit spreads are widening, which suggests a deteriorating credit market environment.

The U.S. High Yield Option Adjusted Spread (OAS) has widened from its late September low at 2.69 after narrowing from its April peak at 4.61. When the high yield OAS stops narrowing and begins to bottom while equities continue to advance, which was the case for the S&P 500 into late October, the danger of a risk-off widening of this credit spread increases.

If the high yield OAS sustains a widening trend—reflecting deteriorating credit conditions—above the 3.13–3.18 area, it could serve as a broader risk-off warning signal, in our view. It closed at 3.20 yesterday.

Chart 1: S&P 500 (top) and the U.S. High Yield Option Adjusted Spread (bottom)