Macro
Credit Spreads Are Pricing in No Recession. We Disagree.
Feb 14, 2026 · 16 min read · Winvestor Analyst Team
Investment-grade spreads are near 20-year tights and high yield is back below 300 basis points. The credit market is pricing in a textbook soft landing. We think the risk-reward in credit is the worst it has been since 2007.
Where spreads actually are
IG OAS is 78 bps versus a 20-year average of 145 bps. HY is 280 bps versus 510 bps. Both sit in their lowest decile of historical observations. The compensation for credit risk has rarely been lower.
What is keeping spreads tight
Strong technicals are doing most of the work. Demand from insurance, pension, and private credit allocators has overwhelmed net issuance for six consecutive quarters. Issuance has been front-loaded by treasurers locking in low spreads, and refinancing waves through 2027 are largely complete. These technicals can persist — but they do not constitute fundamental value.
Why this matters for equity investors
Tight credit historically precedes equity volatility by 6-12 months. More importantly, equity-credit pair trades within capital structures look unusually attractive — owning short-dated investment-grade debt of cyclical companies while underweighting the equity has positive expected value in 7 of 10 macro scenarios we model.
The private credit overlay
A meaningful share of leveraged credit risk has migrated out of the public HY market into private credit funds, where mark-to-market discipline is far weaker. Reported defaults and PIK conversions in private credit have been quietly rising. If a more severe credit cycle materializes, public HY may understate the true distress in the leveraged finance ecosystem — but it will not be immune to the eventual repricing.
What we are doing
We are not calling a recession. We are saying that the asymmetry in credit is poor: limited upside, meaningful downside. For balanced portfolios, we have shortened duration, upgraded credit quality, and rotated some HY exposure into floating-rate bank loans where covenants and collateral provide better downside protection.
Indicators we are watching
Three signals would prompt a more constructive view on credit: (1) IG spreads widening past 110 bps without a recession landing, (2) HY default rates trending back toward long-term averages around 3.5%, and (3) net issuance turning convincingly negative. Until those signals emerge, the safer trade is up-in-quality and short-in-duration.