US credit has been one of the most stable asset classes over the last 15 years. With the exception of the pandemic, which briefly pushed spreads up until the government flooded the market with stimuli, yields have provided steady cash flows to investors with minor hiccups. In the chart below, you can see the correlation between the U.S. policy uncertainty and credit spreads, and you can see that they rarely separate from each other. Starting in the end of 4Q24, however, policy uncertainty has spiked up, surely due to inflation, deficits and tariffs, and yet spreads have been muted. This is not normal and we should expect both lines to converge: either policy uncertainty recedes and the green line goes down or spreads start to widen in response to those unknowns. The glue that has spreads close to the time axis is liquidity. That might be the key indicator to monitor to control the health of the credit market.
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