What drives credit spreads when rates rise?

Question: What drives investment-grade credit spreads in rising-rate environments?

Brad Payne: During periods of rising or falling Treasury rates, we expect investment-grade credit spreads to generally move in the opposite direction. So if we expect or see interest rates rise, generally we see credit spreads tighten. And the reason that happens is, in a rising-rate environment where the Fed is generally hawkish, the economy is typically on solid footing, meaning employment is strong, unemployment is low, inflation is a little bit high or elevated. Whereas, when the opposite is true, when the Fed is more dovish or lowering interest rates, generally they're trying to spark investment or spark spending, and credit spreads tend to be a little bit wider because balance sheets, corporate balance sheets might not be in great shape or leverage may be elevated. So, generally these two things have an inverse relationship.

If you look on a year-to-date basis in 2026, this has generally held true. We've seen short-term interest rates move higher, but credit spreads have actually tightened. Now, that being said, because of where we are in this environment, we think credit spreads should hopefully remain somewhat range-bound. Just because any Fed rate increases that we are seeing are just tackling the problem of inflation. So, we think that this isn't a long-term rate hiking cycle, so credit spread should remain kind of in the range that we've seen them throughout this year.