This silent alarm in the bond market tells you which stocks to buy and which to avoid

By Robert Ross

Widening credit spreads are sending an important signal to stock investors, more so than just rising Treasury yields

Credit spreads are flashing yellow.

Investors have spent months obsessing over Treasury yields.

And for good reason. The 10-year yield BX:TMUBMUSD10Y hasn't been this high since before the global financial crisis.

But looking at Treasury yields in a vacuum isn't as useful as watching credit spreads. Because while Treasury yields tell you the price of money, credit spreads tell you whether that price is starting to break something.

And for the first time since the onset of the Iran conflict, credit spreads - the extra yield investors demand to own corporate debt instead of a comparable Treasury bond - are sending a warning.

Think about it this way. You have one friend who always pays you back and another who's a little unreliable. If the dependable friend offers you 5% to borrow your money, you might demand 8% from the unreliable friend because there's a greater chance something goes wrong.

That extra 3% is basically the credit spread. If you suddenly demand 10% or 12% from the unreliable friend, his situation may not have changed yet, but you're clearly becoming more worried about getting your money back. When spreads start widening like they are now, it tells me investors are becoming more worried about losing their money.

Spreads on high-yield debt, which are those lower or even "junk" credit ratings, spent much of the summer near the narrowest levels seen in five years despite the highest 10-year Treasury yield in decades, $100 oil, persistent inflation, geopolitical turmoil, Fed tightening fears, and increasingly loud concerns about an AI bubble.

That complacency is starting to crack.

Credit is finally reacting

The ICE BofA U.S. High Yield Option-Adjusted Spread widened 48 basis points, or 0.48 percentage points, from Aug. 28 to Sept. 30. That 48-basis-point move isn't enormous by historical standards, but the speed of the widening is what caught my attention.

Especially since the weakest borrowers are getting hit first.

The ICE BofA US High Yield Index Option-Adjusted Spread as a percentage since October 2025, with a peak in early 2026 and another sharp increase at the end of September.

Spreads on CCC-rated debt - the lowest-tier junk bonds - widened roughly 131 basis points over the past month, compared with just 5 basis points for BBB-rated debt, which is the lowest tier for investment grade bonds. That tells me the bond market is becoming much more skeptical of leveraged and speculative borrowers while higher-quality corporate credit remains relatively calm.

That fits with how credit stress historically begins. But it also jives with what's happening in artificial intelligence financing.

AI-related borrowing in U.S. leveraged finance has surged to roughly $88 billion this year, versus about $20 billion in early 2025, and investors are demanding higher yields from riskier borrowers whose business models require enormous upfront capital.

But while this is a warning sign, some perspective is important.

Not time to pull the rip cord

High-yield spreads around 3.1 percentage points are still relatively tight. Last year during the height of the "liberation day" crisis, credit spreads widened to 4.6 percentage points. And during the global financial crisis, spreads approached 20 percentage points.

So at present, we are nowhere near crisis levels. What concerns me is the direction.

When risk-free rates rise, corporate borrowing costs go up automatically. If credit spreads start widening at the same time, weaker companies get hit from both sides.

Profitable companies are mostly insulated from this. But smaller companies who need fresh financing to keep expanding that extra interest can eat up cash flow, force spending cuts, delay hiring or eventually make refinancing impossible.

That's why widening credit spreads usually hurt the most speculative companies first.

Stocks have mostly ignored these warnings. That makes sense, as the large, profitable companies propping up the market like Micron (MU), Apple (AAPL) and Nvidia (NVDA) aren't dependent on junk-bond financing to fund their growth, giving them much more breathing room. That's a key reason the S&P 500 SPX is a mere 1% off all-time highs despite some of the worst market breadth since the dot-com bubble.

That said, widening credit spreads sends an important signal every investor should heed about which stocks to buy and which to avoid.

Time to 'high grade' your portfolio

When credit conditions start deteriorating, I like to "high grade" my portfolio.

That means trimming exposure to the companies most dependent on cheap capital: small-capitalization companies that are highly leveraged, unprofitable growth stocks and speculative businesses that constantly need to refinance. That includes some of the most popular stocks among retail investors, like Affirm (AFRM), AST SpaceMobile (ASTS) and Bloom Energy (BE).

At the same time, I want more exposure to companies with strong balance sheets, massive free cash flow, and businesses that can fund their own growth. In my next issue of "Let's Analyze" on Substack, I'll share 10 companies I think are best positioned to weather a prolonged period of wider spreads and expensive money. Click here to have the full report sent to your inbox when it goes live Monday.

For now, the line I'm watching most closely now is BBB credit. If stress starts spreading from junk bonds into investment-grade companies, that would tell me the problem is becoming much broader.

But as of today, credit is flashing yellow. I'm not pulling the rip cord, but I am paying attention to where the stress is showing up and making sure the companies I own can fund themselves if money stays expensive longer than Wall Street expects.

If spreads keep accelerating and that stress starts moving from junk bonds into investment-grade credit, that yellow light gets a lot closer to red.

Robert Ross is the founder of TikStocks and author of "A Beginner's Guide to High-Risk, High-Reward Investing." A former chief equity analyst at Mauldin Economics, Ross writes the investment newsletter Let's Analyze on Substack and hosts the weekly "Room to Run" podcast.

-Robert Ross

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10-01-26 1410ET