Will US IG credit spreads widen above 120bp by September 30, 2026?
The Condition
Fed cuts rates by at least 50bp total by September 2026 FOMC (to ≤3.25%)
Our Ensemble Estimates
Given Fed cuts ≥50bp by Sep: Will US IG credit spreads widen above 120bp by September 30, 2026?
Given Fed disappoints on cuts: Will US IG credit spreads widen above 120bp by September 30, 2026?
Causal Effect
Fed rate cuts worth ~8pp REDUCTION in IG spread widening probability — easing validates front-running and provides credit market backstop, making stress events less likely to breach 120bp
Why This Matters
Tests whether Fed rate cuts maintain the historically loose US financial conditions or whether the convergence trade unwind creates financial stress. US IG spreads are currently at 79bp, well below the 5-year median, and NFCI is at -0.568 (loosest measured level). The analysis finds US conditions are running 100-150bp more accommodative than the 3.64% policy rate would produce, partly due to market front-running of expected cuts. If the Fed delivers ≥50bp, this validates the front-running and may sustain tight spreads. However, the dual-sided financial conditions decoupling (US too loose, eurozone too tight) is historically unusual and creates potential for abrupt normalization.
Resolution Criteria
ICE BofA US Corporate Index Option-Adjusted Spread (FRED series BAMLC0A0CM) shows a daily value at or above 120bp on any business day between February 22, 2026 and September 30, 2026
Source Analysis
NFCI above -0.40 would signal meaningful US conditions tightening, potentially unwinding the conditions-policy decoupling