Behind the Yield

The Credit Markets Are Speaking. Advisors Need to Listen.

By Charles Urquhart, CFA · December 1, 2025

By Charles Urquhart, CFA

For most advisers, daily life revolves around two dashboards: the equity markets and the

economic releases. One is subject to greed and fear. The other comes with a lag, setting the stage

for what happened yesterday, not what's happening today.

But a third dashboard, rarely given the same focus, should be credit markets. Credit markets are

ahead of earnings calls, FOMC press releases, and headline writers. They respond to situations

when cash flows tighten, refinancing risk intensifies, and households start to feel the pinch.

Those advisers who listen to credit often find inflection points well in advance of what

eventually makes its way into the series of economic data and broader narrative. This article will

review how/why credit leads the cycle, what it currently means, and what advisers need to know

so they're never caught off guard.

I. Why Credit Leads the Cycle

Credit moves differently than equity. Equity relies on story, feel, political narrative, or

momentum. A good story can prop a price up for much longer than it should be propped up when

the underlying fundamentals cave.

But a bond is not a story.

It's a contract.

It's either in the position to comfortably pay or it's not.

Such simplicity invites discipline.

Three structural dynamics ensure credit moves ahead of the data:

1. Bonds Don't Pay Investors to Wait for Good Stories

Equity investors can wait out a story for years on end. Bondholders are given a coupon and par

redemption; there's no monetary value in fiction and there's no incentive in hope. When cash

flow becomes impaired, however, credit no longer pays those investors, thus the price moves

immediately.

2. Equity Investors Can Afford Optimism, Credit Investors Cannot

Equity investors have the luxury of optimism. There is unlimited upside; there's nothing

theoretically stopping a company from achieving 2x or 3x its value, which means equity holders

are relatively okay taking some pain here and there to fuel greater aspirations down the line.

Credit investors do not have that luxury. Credit has an upside capped to a bond, maybe a few

coupons, and par at maturity, but downside risk from a borrower going bad is catastrophic. Thus,

this asymmetry dictates that credit investors respond at the first hint of any downgrade.

3. Cash Flow Stress Happens Before Accounting Reflects It

Coverage ratios decline, refinancing costs increase, working capital starts deteriorating far before

quarterly reports pick it up. Financial statements are backward-looking; credit is a gauge of stress

in the present. This isn't a hypothesis; it's how every major cycle has happened.

II. When Credit Told the Story First

The Dot-Com Bust (2000)

High-yield spreads widened through 1999 as fragile business models began to crack, and the

public debate over a "tech bubble" emerged months too late, as credit had already priced in the

risks.

The Global Financial Crisis (2008)

Subprime mortgage indices began to crack in early 2007 as equity markets took roughly another

year to accept reality. Credit was the first market to identify the structural break.

Pandemic Shock (2020)

High-yield spreads blew out immediately as securities liquidity went to zero; equities did not

react until later when all funding markets tightened.

Inflation Turn (2022)

TIPS break-evens priced inflation in long before policymakers dropped “transitory” from their

lexicon, as credit once again positioned itself well ahead of the narrative.

There’s a central theme across every cycle: credit moves first, then data corroborates, then

the headlines come last.

III. What Credit Markets Are Saying Right Now

Today's credit markets aren't screaming "crisis!"

But they do signal tightening conditions, decelerating activity, and a more nuanced backdrop.

In order of severity:

1. Consumer ABS Is Decelerating

Credit card, BNPL, and personal loan ABS pools are seeing rising delinquencies and reduced

excess spread, one of the clearest observations of household stress, and a lack of access to cheap

credit, especially for middle- and low-income borrowers.

2. High-Yield Dispersion Is Widening

Those high-quality issuers that need to refinance are doing so without issue; those that were

already weak are being quoted at 10%+ borrowing costs; classic early-cycle split credit market.

3. Interest Coverage Ratios Declining

More companies cannot cover interest with earnings, which is a precursor to wider spreads and

tighter credit availability.

4. 2026–2027 Refinancing Wall Is Approaching

Many issues will have to refinance bonds issued at far lower rates and rolling that debt will

create strain on cash flows for marginal issuers.

5. Discretionary BBB Credits Are Weak

Credits in cyclical sectors with thin coverage are declining; earnings revisions are negative;

historically, this means they are on the front end of a downgrade cycle.

6. Private Credit Is Showing Late-Cycle Behavior

More amendment requests, more pay-in-kind toggles, and increased NAV financing usage show

access to capital is tightening.

7. Subprime Auto Stress Is Increasing

Repos are increasing; recoveries on repossessed autos are decreasing as vehicle prices normalize;

together this signifies tightening conditions for lower-income borrowers.

8. CDS Curves Are Flattening

The probability of default pricing is weighted more heavily in the short end than in the long end,

an indication of front-loaded weakness.

9. 30-Year Treasury Volatility Is Extreme

As investors debate inflation and deficits and the extent of long-duration demand, volatility

makes its way into corporate financing costs.

10. Dealers Are Reducing Balance Sheet

Thinning dealer capacity means even modest flows create extreme price movement; liquidity can

thin rapidly.

11. CLO Equity Returns Are Contracting

Lower expected IRRs point to weaker loan fundamentals underneath them, and the aging phase

of any credit cycle.

These signals indicate not a crisis, but reduced growth expectations, tighter conditions, and

hypersensitivity.

IV. Implications for Advisors

1. Don't Let Clients Stay in an Ex-Post World

Household stress is indicated in credit data long before it breaks in the news. Educating clients

about this can help them get out of anxious mindsets.

2. Reassess Credit Exposures with Caution

Overexposure to weaker HY issuers, cyclical BBB names, thin-coverage balance sheets, long-

duration corporates, etc., is not the move. Focus on quality, shorter-duration assets with

appropriate laddering.

3. Reinvestment Risk vs Credit Risk

The maturity wall has arrived and will impact 2026–2027 maturities raised in a lower-rate

environment. Distinguish between:

 issuers who can refinance without issue,

 those who can refinance only at higher rates,

 and those who cannot refinance at all.

This distinction matters more than any top-down forecast.

4. Clients Should Be Educated About Volatility

Most volatility today stems not from earnings or deleveraging, but from structural mechanics:

financing conditions, dealer capacity, collateral, and cash-flow timing. Clients need to

understand this is mechanical volatility — not existential risk.

V. The Bottom Line

Credit is not a doom-sayer.

Credit is numeric.

It acts in advance because cash flows dictate action.

At all points in the cycle, credit tells the story before data and news substantiate it.

Today, that story is not crisis. It is caution. A slowing environment with tighter conditions and

fewer cushions.

Credit tells the story first; news tells it second.