The U.S. economy's shock absorbers are worn, and that could make for a bumpy ride if recent investor anxiety worsens. Normally, companies and individuals are cushioned by the Treasury bond market when a slowdown seems to be brewing. One of the best early indicators of a recession is a rush to buy those supersafe securities.
That trend is convenient for Uncle Sam, who in that case might have to issue more of them to fund unemployment checks. It also serves as an indirect lifeline to the private sector. A slowdown makes default fears rise and credit spreads widen. Those spreads represent the average excess yield lenders demand by credit-rating category compared with theoretically risk-free Treasury debt.
You'll always hear a lot about how spreads are "blowing out" in a crisis, but rarely about what actual borrowing costs are. That gap in coverage matters, because the cost of money for businesses and households is what ultimately shapes spending and hiring decisions.
The double whammy is that the cushion from Treasuries and the pressure from widening spreads can hit at the same time, leaving borrowers squeezed from both directions. Investors watching these signals closely may see them as an early warning that the economy is losing momentum.
Source: Wall Street Journal Markets · Summarized by HeadlinesBriefing