Lesson 3
Warning Signs
Build a credit warning dashboard. When you see 3+ warning signs, get defensive regardless of how stocks are doing. Credit investors are often smarter and earlier than equity investors.
📊 Indicators mentioned in this lesson (click for details):
The credit cycle gives warning signs before it turns.
Quantitative Warning Signs (Late Cycle):
- Credit Spread Widening:
- HY spread (BAMLH0A0HYM2)s above 500 bps = elevated fear
- HY spread (BAMLH0A0HYM2)s above 800 bps = crisis
- Rapid widening (100+ bps in a month) = panic starting
- SLOOS Showing Tightening:
- Net tightening above 40% = recession warning (has preceded every recession since 1990)
- Leveraged Loan Issuance Collapsing:
- When LBO volume dries up, credit is freezing
- CLO Creation Slowing:
- CLOs are the engine of leveraged lending
Qualitative Warning Signs (Peak Excess):
- 'Covenant-Lite' Becoming Standard
- LBOs at Record Multiples (10x+ EBITDA)
- Credit Hedge Funds Closing
- 'Yield Tourism' (pension funds reaching for risky credits)
Check your understanding
Lesson Quiz
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Quiz Check
What are the key credit spread (BAMLH0A0HYM2) thresholds for the HY OAS (High Yield Option-Adjusted Spread)?
Quiz Check
HY spread (BAMLH0A0HYM2)s widened from 400 to 550 bps over 2 months, but stocks are making new highs. What's likely to happen?