Credit Conditions and Risk Taking

The availability of credit, to borrow, spend or invest, is the lifeblood of the financial market.  That’s why credit conditions are a good indicator of risk appetite.  The easiest way to gauge real time credit conditions is by observing the yield differential between 10-year, BBB bonds and 10-year Treasury notes.  Since the bond market is roughly seven times the size of the stock market, the yield premium lenders require to extend credit to lower-quality borrowers is a useful barometer.

Rising credit spreads can also be early warning indicators of trouble.  Our credit spread model broke out in Q4/2007, four quarters – an entire year – before trouble swept through the broader markets.  While credit conditions are favorable today, spreads have widened in recent weeks and are currently situated just below their 200-day moving average.  Continued widening would be a risk-off signal.

Favorable credit conditions along with a favorable economic backdrop, reasonable equity market valuations and positive momentum are keeping us engaged in equity risk-taking.  That could change should credit conditions deteriorate.

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About Cresset

Cresset is an independent, award-winning multi-family office and private investment firm with more than $40 billion in assets under management (as of 7/13/2023). Cresset serves the unique needs of entrepreneurs, CEO founders, wealth creators, executives, and partners, as well as high-net-worth and multi-generational families. Our goal is to deliver a new paradigm for wealth management, giving you time to pursue what matters to you most.

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From Chief Investment Officer, Jack Ablin.