Credit Conditions

Are credit conditions tight?

Critics of financial conditions indices will typically point to the large impact of equities. There is merit to this argument; equities are volatile and can move sharply for non fundamental reasons. Additionally, equities have tended to peak right as recessions begin, so there is an argument that they don’t always anticipate growth inflection points. Although historically that has been the case, I would argue that this cycle has behaved quite differently, with equities the forward leading indicator for the economy and the bond market a reactionary market.

Regardless of the view of financial conditions, the goals of monetary policy tightening are to reduce the flow and availability of credit. How do credit conditions currently look? Let’s take a look at both consumer and corporate credit conditions.

Corporate Sector:

Both IG and HY Spreads are extraordinarily tight, and have only tightened further in the last 12 months. In fact, they are tighter than they have been during some of the loosest periods of monetary policy.