Most equity market participants focus on price charts and sector rotation, but very few monitor the most reliable early-warning mechanism for market stress: the relationship between high-yield and investment-grade credit. In my view, this relationship, expressed through the HY-IG spread, often gives the first indication that market conditions are changing, well before equity indices begin to reflect the shift.

The problem is that many rely on incomplete proxies, such as the popular HYG or LQD ETFs, without accounting for the rate distortions embedded in these instruments. This approach can mask the underlying change in credit conditions. By contrast, direct monitoring of the spread between high-yield and investment-grade yields allows for a clearer view of funding stress as it emerges.