Which trend is indicated by tightening credit spreads?

Which trend is indicated by tightening credit spreads?

• A. Recession fears
• B. Economic optimism
• C. Market caution
• D. Investor anxiety

Answer: (B)

Tightening credit spreads indicate economic optimism because they suggest that investors are more confident in the creditworthiness of borrowers. When credit spreads narrow, it typically reflects a lower perceived risk for corporate bonds compared to government securities. This often happens in a strengthening economy where businesses are expected to generate more revenue, thus making them less likely to default on their debts. As investors gain confidence, they are more inclined to lend money at lower interest rates, leading to tighter spreads. This overall acceptance of risk and increased borrowing signals a positive outlook for economic growth.

Tightening credit spreads indicate economic optimism because they suggest that investors are more confident in the creditworthiness of borrowers. When credit spreads narrow, it typically reflects a lower perceived risk for corporate bonds compared to government securities. This often happens in a strengthening economy where businesses are expected to generate more revenue, thus making them less likely to default on their debts. As investors gain confidence, they are more inclined to lend money at lower interest rates, leading to tighter spreads. This overall acceptance of risk and increased borrowing signals a positive outlook for economic growth.