To The Moon

$S&P 500(.SPX)$ $NASDAQ(.IXIC)$ Credit spreads in the U.S., UK, and EU have collapsed to their tightest levels since 1998, with investment-grade (IG) bonds in the U.S. at 0.75% over Treasuries and Euro high-yield (HY) spreads at 2.69% as of September 23, 2025. At first blush, this screams market confidence—corporate debt is priced as if risk is nearly nonexistent. But history’s a harsh teacher: ultra-low spreads often signal complacency, setting the stage for brutal wake-up calls like the Euro debt crisis (2011-2012), China’s 2015 slowdown, and the Covid crash of 2020. With Trump slamming Powell’s “incompetent” high rates, Eric’s $1M Bitcoin bet, and Centurion REIT’s 9.1% IPO pop, are investors sleepwalking into a trap? Should you hedge, chase yield, or brace for a shock?

Why Are Spreads So Tight?

Credit spreads—the gap between corporate bond yields and risk-free government bonds—measure the market’s perception of credit risk. Right now, they’re razor-thin: U.S. IG spreads are at 0.75%, down from 1.2% a year ago, while Euro HY spreads hit 2.69%, the lowest in 2025. Why? Resilient fundamentals are one piece—corporate balance sheets are flush, with U.S. default rates steady at 5.8% for HY and near 0% for BB/B-rated bonds. The Fed’s 50bps rate cut to 4.75-5% and ECB’s easing have fueled optimism, driving demand for yield (EU IG at 3.1%, HY at 5.3%). Add in record-low unemployment (3.8% U.S., 6% EU) and stabilizing inflation (2.4% U.S., 2.2% EU), and markets are betting on a soft landing.

But there’s another angle: private credit and insurer capital flooding markets have crushed spreads by boosting competition, especially in HY. EUR and GBP credit markets are outperforming USD, with EUR IG spreads 0.5% tighter than U.S. equivalents, partly due to Europe’s higher post-hedge yields attracting foreign cash. Primary markets are buzzing—June 2025 saw record EUR HY issuance—showing issuers are capitalizing on this euphoria.

History’s Warning: Complacency Breeds Crises

Low spreads aren’t new, but they’re a red flag when they hit extremes. Before the Euro debt crisis (2011-2012), EUR IG spreads were ~1%, spiking to 3% as sovereign defaults loomed. In 2015, China’s slowdown pushed U.S. HY spreads from 4% to 7% as commodity firms tanked. Covid’s 2020 crash saw U.S. IG spreads explode from 1% to 4% in weeks. Today’s 0.75% U.S. IG and 2.69% Euro HY levels are tighter than pre-crisis lows, suggesting markets are shrugging off risks like:

• Tariffs and Trade Wars: Trump’s proposed tariffs could disrupt global supply chains, hitting EU and China harder than the U.S. BBVA warns a trade war could widen EUR spreads more than USD ones.

• Monetary Tightening: Trump’s slamming Powell’s 4.75-5% rates, but sticky services inflation (3.1%) and strong jobs data (200k+ adds) mean the Fed might hold firm, squeezing overleveraged firms.

• Geopolitical and External Shocks: From Middle East tensions to China’s sub-5% growth outlook, catalysts for volatility are piling up.

• Earnings Fog: Q3 earnings kick off soon, and tariffs could cloud visibility. HY default rates ticked up to 5.8% in May, concentrated in weaker CCC-rated names.

Posts on X highlight the disconnect: IG spreads at 1998 lows signal “irrational exuberance,” yet corporate debt levels are rationalized by strong cash flows. But when consumer loan delinquencies diverge from tight HY spreads, it’s a late-cycle warning.

Hedge, Yield, or Hold?

With spreads this tight, the payoff for credit risk is meager—Schroders notes spreads still cover long-term default losses but leave little room for error. Here’s how to play it:

• Hedge: Buy protection via credit default swaps (CDS) or VIX calls (VIX at 18) to guard against a spread-widening shock. If you’re heavy in U.S. equities (S&P down 1.5% this week), trim tech (P/E 32x) and add 10% to defensives like utilities (3.5% yield) or gold ($2,700).

• Yield Chase: Singapore’s Centurion REIT (CAREIT) at 7.47% yield offers stability with 100% occupancy and 20.9% gearing. REIT ETFs like Lion-Phillip S-REIT (5.5% yield) diversify across 20+ names, dodging single-stock risk. Euro HY bonds (5.3%) are tempting but riskier if trade wars hit.

• Crypto Speculation: Eric Trump’s $1M Bitcoin call leans on deregulation and adoption (420M users). BTC’s dip to $108,672 (-7.8% weekly) could be a buy, but limit to 5% of your portfolio—too volatile for more.

• Hold Cash: With spreads this tight, cash (4% in T-bills) or short-term bonds beat chasing overpriced corporate debt. If spreads widen to 1.5% (IG) or 4% (HY), you’ll have dry powder to pounce.

Here’s a snapshot of key asset moves this week:

The Bottom Line

Tight spreads scream confidence, but they’re flashing the same complacency seen before 2011, 2015, and 2020 blowups. Trump’s rate rants and tariff threats could spark volatility, especially if Q3 earnings falter or China’s slowdown bites. Hedge with CDS or VIX, lean into stable yields like CAREIT or REIT ETFs, and keep 10-20% in cash for when spreads crack. Bitcoin’s a long-shot bet—Eric’s $1M call is bold, but macro risks loom large. What’s your play: hedging hard, grabbing yield, or waiting for the dip? Drop your take below; let’s unpack the risks.

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