Credit vs equities: Crisis or correction?

April 22, 2025

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

When looking for evidence of investor panic in response to tariff-induced uncertainty, a single chart illustrates the difference between equities and credit markets, as Anthony DeMeo and Eric Schure explain.

Markets are sending mixed signals. In response to tariff and macro uncertainty, equity volatility has recently surged to levels that suggest crisis, yet US credit spreads have so far remained relatively well-contained.

This divergence is striking, and something investors need to monitor closely, not because it gives a clear picture of what to expect next, but because it can help frame the current environment and potential outcomes.

As Figure 1 highlights, US credit spreads have widened, but not dramatically, and certainly nowhere near the moves in US equities, where volatility more than doubled between April 2 and April 8.

Here, context is important. In the post-global financial crisis period, credit has sometimes lagged broader risk-off moves, in no small part due to structural shifts in how markets function, including balance sheet constraints among dealers.

In stable equity markets with moderate volatility, credit spreads tend to stay contained. But sharp and sustained drawdowns in equities can eventually spill over, triggering selling by more risk-averse credit investors. If equity volatility remains elevated, we could see credit spreads drift wider. If volatility calms, spreads may retrace tighter. Investors will reasonably ask: What flinches first?

Catalysts for crises and comebacks

To understand where we are, it is useful to reflect on where we have been. Over the past two decades, we have experienced multiple episodes of market disruption, often accompanied by clear catalysts and followed by decisive policy intervention.

In 2008, the Global Financial Crisis led to unprecedented US government action, including through the Troubled Asset Relief Program¹ and aggressive rate cuts by the Federal Reserve. The 2010 ‘Flash Crash’ brought about regulatory reform by the Securities and Exchange Commission.² In 2011, the debt ceiling crisis prompted swift legislative action.³  Even in 2018/19, fears around the growing BBB cohort in the US investment-grade market were tempered by a dovish Federal Reserve.

The pattern continued through the COVID-19 crisis in 2020, with coordinated monetary and fiscal support stabilizing both the real economy and financial markets. And in 2023, the swift collapse of Silicon Valley Bank was met with immediate regulatory and government intervention to stem contagion.⁴

Is this time different?

The common thread in the above examples is that policymakers acted as circuit breakers during periods of stress, dampening volatility and restoring order.

Current market instability is not the result of unforeseen economic shocks or systemic financial imbalances, but rather policy itself—specifically the uncertainty stemming from trade tensions and tariff actions by the Trump administration. While there may be longer-term strategic motives behind tariffs, the short-term result has been a surge in the volatility governments and other policymakers typically aim to contain.

So, what does this mean for investors?

First, it is important to recognize that resilience in credit relative to equities may not hold if volatility persists. Either equity markets must stabilize, or credit spreads will likely reprice to reflect persistent uncertainty. If the latter occurs, it could mark more than just a repricing of risk—it might be the market beginning to price in recession as a base case.

This is not a call on direction, but a recognition that not all market signals are aligned—and that divergence itself is a risk worth monitoring.

References

1.US Department of the Treasury, Troubled Asset Relief Program, as of September 30, 2023
2.Securities and Exchange Commission, ‘The SEC - Revitalized, Reformed and Protecting Investors,’ November 26, 2012
3.US Government Accountability Office, ‘Analysis of 2011-2012 Actions Taken and Effect of Delayed 4.Increase on Borrowing Costs,’ July 23, 2012
4.Federal Deposit Insurance Corporation, ‘Recent Bank Failures and the Federal Regulatory Response,’ March 27, 2023

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of April 2025, and may change without notice.

--------

Index descriptions

C0A4 - The ICE BofA  BBB US Corporate Index is a subset of the ICE BofA  US Corporate Index (C0A0) including all securities rated BBB1 through BBB3, inclusive. The ICE BofA OASs are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond's OAS, weighted by market capitalization. When the last calendar day of the month takes place on the weekend, weekend observations will occur as a result of month ending accrued interest adjustments.

H0A1 - The ICE BofA  BB US High Yield Index is a subset of the ICE BofA  US High Yield Index (H0A0) including all securities rated BB1 through BB3, inclusive. The ICE BofA OASs are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve. An OAS index is constructed using each constituent bond's OAS, weighted by market capitalization. When the last calendar day of the month takes place on the weekend, weekend observations will occur as a result of month ending accrued interest adjustments

Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

This discussion material contains forward-looking statements, which give current expectations of future activities and future performance. Any or all forward-looking statements in this material may turn out to be incorrect. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Although the assumptions underlying the forward-looking statements contained herein are believed to be reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurances that the forward-looking statements included in this discussion material will   prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Further, no person undertakes any obligation to revise such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC.

Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.