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The Combined Credit Spread Model Falls to Unfavorable

Jay Kaeppel
2026-03-20
Widening credit spreads often signal turmoil in the financial markets. Our Combined Credit Spreads Model combines two useful measures of credit spread trends and has fallen into unfavorable territory, lending key weight to the unfavorable side of the weight-of-the-evidence ledger.

Key points:

  • Credit spreads serve as a "fear gauge" in the credit markets - narrow/falling spreads suggest calm, rising spreads suggest concerns
  • Our Combined Credit Spreads Model recently fell into unfavorable status - suggesting limited upside and increased volatility for stocks while this status remains
  • The Combined Credit Spreads Model is comprised of two credit spread-related indicators - ICE BofA US High Yield Option-Adjusted Spread and the CDX Index
  • Part I reviews the indicators that comprise the Combined Credit Spreads Model

Indicator #1: ICE BofA US High Yield Index Option-Adjusted Spread

The ICE BofA US High Yield Index Option-Adjusted Spread (HYCS) measures the spread between the computed index of below-investment-grade bonds and the spot Treasury curve.  

We rate the spread as favorable when it is in a downtrend and unfavorable when it is in an uptrend. We designate its trend as follows:

A = HYCS weekly close

B = 13-week exponential average of A

C = 28-week exponential average of B

The chart below displays these variables.

From here, we take the difference between the two moving averages. 

D = A - B

The char

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