U.S. Economics – Credit Cycle

Intro

Monitoring the credit cycle is critical to understanding where we are likely at in the economic cycle. There are several indicators we can track to help gauge which slope of the credit cycle sine curve we are likely moving along. By varying degrees, corporate bond issuance, credit spreads, credit expectations, and commercial bank loan growth have been moving in the right direction relative to their respective cycle highs/lows which are likely positives for economic activity.

Credit Cycle

The Signals:

• U.S. IG and HY Corporate Bond Issuance (Chart 1)
  • According to data from SIFMA, U.S. Investment Grade (IG) Corporate Bond issuance totaled $186.8 billion for the month of January while US High Yield (HY) Corporate Bond issuance came in at $27.5 billion.
    • For the IG space, this was the second largest dollar amount on record for January going back to 2008, behind only last year’s tally of $194.6 billion.
    • The HY market had a slow start in January but was bolstered by a $5.5 billion bond issued by Quikrete Holdings at the end of the month.
      • In terms of the cycle, annual HY issuance is still below its 2021 record high of $486.8 billion but well above its 2022 low, having grown by 64% in 2023 compared to 2022 and increasing by an additional 64% in 2024 compared to 2023.
  • U.S. IG and HY Spreads (Chart 2)
    • • The ICE BofAML Option-Adjusted Spreads (OAS) Indexes for U.S. IG and U.S. HY bonds are at 82 basis points and 271 basis points, respectively.
        • The tightening trend in the U.S. IG OAS Index started to take hold following the March 2023 bank failures, and while the pace of tightening has somewhat leveled off over the last two months, it remains near its lowest level since 2005.
        • The U.S. HY OAS Index has moved in a similar direction, but the absolute change in spread tightening has been more significant, reflecting a so-called risk-on environment that tends to occur when the economic backdrop is positive.
  • Senior Loan Officer Opinion Survey (Chart 3)
    • • • Domestic banks reporting stronger demand across loan categories (the midpoint between business loans and household loans) increased to 8.7 in 1Q25, well above its cycle low of -49.9 in 1Q23 and its highest level since 1Q22.
        • Domestic banks reporting tightening standards across loan categories (the midpoint between business loans and household loans) decreased to -0.2, well below its cycle high of 42.0 in 2Q23 and its lowest level since 2Q22.
          • The path of both indicators has moved in a direction that would suggest the lending environment has become incrementally favorable and is expected to improve further in the first quarter.
  • Commercial Bank Loan Growth (Chart 4)
    • • • • For domestically chartered commercial banks, total loans and leases in bank credit reached 11.5 trillion in the fourth week of January, accelerating to a y/y growth rate of 2.7%.
            • While the y/y pace remains low compared to the decade prior to the pandemic, it is above its cycle low from March 2024 and has been accelerating at a faster pace since October.

The Takeaway:

• If the credit cycle signals mentioned above continue their current path, we would expect to see economic activity accelerate.

Visuals:

(Chart 1)

(Chart 2)

(Chart 3)

(Chart 4)

Source: Macrobond

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.