UBS has noted that U.S. corporate credit markets seem more relaxed than the equity markets. High-yield debt values are close to the highest they’ve been in decades. This indicates a gap in understanding, as credit markets may not be recognizing the risks of an economic slowdown. Risk premiums for U.S. junk bonds are at almost a decade low, reflecting an overly sunny outlook. The current market prices suggest more than 5% global economic growth this year. This is much higher than UBS’s forecast of 2.7% and stock market estimates of 4.5%.

Credit Complacency in the US Market

UBS calls this situation “credit complacency,” which is especially noticeable in the U.S. With inflation remaining high, UBS warns that risk premiums could rise sharply if the economy falters. The corporate credit markets are showing concerning levels of relaxation, especially when compared to equities. In late July 2025, risk premiums in the U.S. junk bond market, as noted by the CDX High Yield index, fell below 320 basis points—something we haven’t seen since before the 2020 market crash. This suggests a too optimistic economic view not backed by fresh data. Given this mismatch, we believe that derivative traders might want to consider buying protection soon. We find it worthwhile to invest in credit default swaps (CDS) on high-yield indices, which are currently priced low due to market optimism. This strategy offers direct protection against the risk of widening spreads, particularly if the economy weakens, as hinted by the slight miss in Q2 2025 GDP numbers. Another strategy is to buy put options on major high-yield bond ETFs, like HYG or JNK. The implied volatility on these options has been close to one-year lows, making puts a smart way to prepare for a possible drop in bond prices. This is especially relevant since the latest CPI data for July 2025 showed that inflation still remains above the Federal Reserve’s target.

Historical Patterns and Market Risks

We’ve seen this pattern before. For instance, before the 2008 financial crisis, credit spreads stayed compressed even with clear warning signs. Historically, the market has ignored growing risks for a long time before a sudden and harsh revaluation. The market instability in early 2020 is another recent example of how quickly sentiment can change and spreads can widen drastically. Create your live VT Markets account and start trading now.

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