Credit spreads in the United States reach their lowest point of the century, following a significant surge in the market.
In the current economic landscape, US corporate borrowing costs remain elevated and are closely linked to Treasury yields and investor sentiment, casting a cautious and uncertain outlook for the global economy.
Treasury yields, particularly the 10-year yield, have shown volatility amid conflicting market signals. Inflationary pressures and economic weakening tug Treasury yields in opposite directions. As of August 2025, the 10-year yield is around 4.29%, with noted tension between expectations for Federal Reserve rate cuts and persistent inflation and fiscal deficits keeping yields from falling below about 4.25%.
Corporate credit risk is mixed but remains under strain. Although the overall distressed corporate loan and bond amount has decreased to about $166.9 billion, this is accompanied by an increase in quarterly corporate debt defaults. Moody’s reports moderate default probability shifts but anticipates greater financial strain ahead due to tariffs and uncertain trade dynamics.
Investor sentiment reflects this tension. Investors are wary, preferring defensive positioning like laddered bond durations, defensive equities, and cash holdings. The surge in distressed debt exchanges instead of outright defaults also signals complex restructuring strategies being favored by borrowers and lenders.
High Treasury yields translate into higher borrowing costs for corporations, contributing to financial stress in sensitive sectors such as automotive, alternative energy, retail, and casual dining, where tariff impacts are felt most acutely.
The broader economic outlook is cautious. The combination of higher borrowing costs, trade uncertainty (especially tariff-related risks), and fiscal deficits projected to substantially increase national debt over the next decade compounds downside risks to growth. Protracted elevated Treasury yields reflect ongoing inflation concerns and federal deficit expansion, limiting accommodative monetary policy room and heightening stagflation risk.
The credit market is expecting five quarter-point interest rate cuts by the Federal Reserve by the end of next year. However, this expectation may not fully alleviate the pressure on corporate credit markets due to the intertwined nature of Treasury yields and corporate borrowing costs.
The dissonance between the credit and rates markets persists. Goldman Sachs analysts stated that US and European credit markets had "largely shrugged off" the different growth outlooks in a "highly correlated" rally. However, David Zahn, head of European fixed income at Franklin Templeton, noted that these markets are showing a dissonance. Spreads in US and Eurozone credit markets, a proxy for the risk of default, have reached their lowest levels since 1998 and 2018, respectively.
Despite the improvement in the trade outlook due to a series of trade deals with Japan, the UK, and the EU, Ben Inker's concerns about confidence in the credit markets, expressed earlier, remain. Market optimism has become overstretched at a time when taking risk does not seem to be adequately compensated.
As jobs data worsens and US tariffs climb to their highest since the 1930s, US jobs and inflation data over the coming months will be closely watched for signs that the trade war is creating economic damage. The credit market's resilience in the face of these challenges will be a key indicator of the global economy's health.
[1] Moody’s Investors Service. (2025). Global Credit Outlook: US Corporate Credit Market Outlook. Retrieved from www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186979 [2] Federal Reserve Bank of St. Louis. (2025). 10-Year Treasury Constant Maturity Rate. Retrieved from fred.stlouisfed.org/series/DGS10 [3] Moody’s Investors Service. (2025). US Corporate Default Rate Outlook. Retrieved from www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186980 [4] BlackRock. (2025). Investment Institute Weekly Commentary: The Great Unwinding. Retrieved from www.blackrock.com/corporate/literature/publication/blackrock-weekly-commentary-august-13-2025.pdf [5] Congressional Budget Office. (2025). The Budget and Economic Outlook: 2025–2030. Retrieved from www.cbo.gov/publication/56333
- The elevated Treasury yields, coupled with the anticipation of persistent inflation and fiscal deficits, might drive up investment costs for corporations and negatively impact global trade markets.
- With Moody’s reporting moderate default probability shifts and an increase in quarterly corporate debt defaults, the financial markets could respond warily to stock investments, potentially slowing down economic growth.
- Despite the rosy trade outlook due to recent trade deals, lingering concerns about financial stress in sensitive sectors, such as inflationary pressures and increased tariffs, could pose a challenge to the overall health and stability of the global economy.
