The Credit Cycle Just Flipped (The Stock Market Is Next)

Jeff Snider · Atlas Financial

Private credit stress is spreading: fund withdrawals are restricted and fund losses are mounting.

The first warning signs came from private credit funds restricting withdrawals, followed by investors rushing to redeem. Snider cites Bloomberg reporting that Arena Capital's master fund lost 6.9% in the first half of October after falling 15.7% through September. Sona Asset Management's main fund lost about 3.1% over two weeks, erasing its 2026 gains. Each manages over $20 billion, and neither had previously lost money over a full calendar year. He reads this as evidence that the long-running credit cycle is ending. He also says the full paper losses have not yet appeared because many firms have not reported updated numbers.

“Private credit funds restricted withdrawals, leveraged loans fell, CCC rated bond spreads surged to now well above 1,300 basis points,”at 0:09

Jeff Snider · Atlas Financial

Investment grade spreads are rising fast and the credit cycle is turning, not just stressing junk borrowers.

Stress began in the weakest parts of credit: CCC spreads passed 1,300bp and are about 1,340bp, up nearly 300bp since early September, while leveraged loans fell and private credit funds restricted withdrawals. Investment grade spreads had stayed calm, which Snider argues was the last holdout pricing a near-perfect outcome. They are now rising fast enough to move back toward the March–April 2025 tariff-turmoil highs. Snider says this is not yet a crisis, since the absolute move is modest next to CCC, but the direction and speed matter. Because the IG-junk divergence is historically extreme, he expects it to close, and a partial convergence could be violent. He also notes that IG borrowers depend on the same consumer demand and energy costs, so they cannot stay insulated.

“Investment grade spreads are rising quickly, moving back toward the levels reached during the tariff chaos of March and April twenty twenty five.”at 0:45

Jeff Snider · Atlas Financial

Equities are at risk because the extreme IG-junk spread gap must close, likely hurting stocks.

Snider argues the stock market has been ignoring credit stress because the junk problems look company-specific. Investment grade credit is different because it finances the large, systemically important companies that dominate equity indexes. The IG-junk divergence is historically extreme, and oil-driven margin pressure may force it to close. If it closes in the direction credit markets are pointing, he says equity indexes will not stay unaffected. He hedges that a stabilisation in IG spreads would let stocks keep looking through junk-market problems, and that a few days of widening does not guarantee a sell-off.

“that's got to close one way or the other, and if it closes in the same direction all the markets are continuing to point at, ... it is not going to be good for stocks.”at 1:54

Jeff Snider · Atlas Financial

A mechanical Fed response to energy-driven inflation could mean more hikes or higher rates for longer.

Snider argues that the energy shock pushes up gasoline, transport and production costs, and so headline inflation. If the Federal Reserve reacts mechanically to that rise, as he says it already has with one hike, it could raise rates again in the short run or keep them elevated longer. He presents this as a possibility rather than a forecast. He contrasts it with the bond market, which is looking past the next CPI print toward the damage to growth.

“And if the Federal Reserve reacts mechanically to that increase, which it already has with [one hike] in the books, it could raise rates again in the short run or keep them elevated for a bit longer.”at 5:18

Jeff Snider · Atlas Financial

Treasuries price the energy shock as later disinflation, not a new inflation regime.

Five-year breakevens rose on the oil-driven CPI jump, but ten-year breakevens fell toward about 230bp, which inverts the inflation curve. The five-year, five-year forward rate fell about 15bp on one Thursday, one of the largest one-day declines in the TIPS market's quarter-century history and the biggest since the August 2024 carry-trade blow-up. Snider says that if oil were expected to drive sustained income growth and self-reinforcing inflation, long-term compensation would rise. Instead it is falling, so the market is pricing the sequence of higher prices now and damage to demand later. Options flows favouring longer-dated Treasury calls, and the 10-year yield dropping below 5%, point to investors seeking safety rather than confidence in nominal growth.

“This is not what a market pricing a new inflationary regime looks like.”at 6:09

Jeff Snider · Atlas Financial

The energy shock is a tax that destroys demand, squeezing household and business budgets.

Snider argues higher energy costs create no income and only redistribute it. Households spend more on gasoline, utilities and transport without higher wages, so they cut restaurants, electronics, travel and other discretionary spending. Businesses face higher fuel, shipping and materials costs, and their ability to pass them on depends on customers having income. Oil raises CPI now but, by reducing household income, squeezing corporate margins and weakening demand, it produces lower inflation later. The energy shock is therefore disinflationary in the medium run after it has done its damage.

“higher energy costs don't create income, they redistribute it in the most harmful way possible.”at 10:35

Jeff Snider · Atlas Financial

Manufacturers cannot pass on energy-driven costs, so the economy is weakening and demand is fragile.

Snider cites the Kansas City Fed's manufacturing survey: raw material costs accelerated while finished goods price increases slowed. More than half of firms say customers have become more price sensitive, and 51% can pass through no more than a fifth of added costs. Backlogs and export orders have weakened. He calls this a margin squeeze, not a wage-price spiral, and admits it is only one anecdote, though he says it is consistent with the wider evidence. He reads it as a sign that a fragile economy cannot absorb the energy shock, which is why the damage is moving up the credit ladder.

“More than half say their customers have become more price sensitive, not less. 51% report they can pass through no more than one fifth of their additional costs.”at 11:27

Jeff Snider · Atlas Financial

Rising costs with slowing revenue will squeeze free cash flow and turn margin pressure into credit stress.

Snider argues that when revenue growth slows while costs rise, free cash flow deteriorates. Companies may respond by cutting investment and payrolls, or by borrowing more. The strongest borrowers can absorb this for a while, but the weakest cannot. The longer the energy shock lasts, the further the damage moves up the quality ladder. He connects the margin squeeze directly to the credit cycle turning.

“When revenue growth slows while costs rise, free cash flow deteriorates.”at 11:50

Jeff Snider · Atlas Financial

Investors are demanding more for bank AT1 and contingent capital, though a banking crisis is not imminent.

Snider cites the average spread on global contingent convertible bonds (COCOs), which rose to about 253bp after falling below 200bp in August and September. A Bank of New York Mellon preferred priced 32.4bp wider than a near-identical structure sold three months earlier. A new AT1 from Belfius was indicated below face value almost immediately, and BancoBPM's AT1 order book shrank during sales. Investors now demand more compensation for loss-absorbing bank capital that can skip payments or go unpaid. He says this does not signal a banking crisis, only that the margin for complacency is narrowing.

“The average spread in Bloomberg's multicurrency index of global contingent convertible bonds or COCOs has risen to approximately two fifty three basis points...”at 15:56

Jeff Snider · Atlas Financial

The VIX should rise if investment grade spreads keep blowing out, since the two are closely linked.

Snider says there is a solid correlation between investment grade spreads and the VIX. When spreads are tight, financing looks easy and investors accept risk. When IG spreads blow out, the VIX tends to rise and stock indexes fall. The link exists because IG credit represents the financing conditions of the large companies that dominate equity indexes, and credit investors price the same fundamentals as stock investors, but credit often recognises the downside first. If spreads converge rapidly with CCCs, he says the VIX is unlikely to stay low.

“the VIX is unlikely to remain low and equity indexes...”at 20:32