Are the C's beginning to offer a new economic message?
October 22, 2026
Strewn throughout many editions over the years, we have offered that the bond market is the smartest market. When that market chirps additional messaging, it is often wise to heed its message, or at a minimum, to at least be aware of its newfound behavior.
We have shared various editions here in 2026 on the bond market with the customary focus being on the treasury segment of that market.
It has been widely reported lately that treasury notes and bonds have been experiencing a sell-off, which in turn increases their interest rate. (When bond prices move lower, their yield moves higher. Think, one up, the other down.)
For our part, we have offered several times to focus more on the interest rate behavior of treasury notes and bonds rather than the Fed and their views on interest rate levels.
While the Fed has offered consistent messaging, with little action relative to their views on raising interest rates, the bond market has offered little discussion and a wealth of action on this topic.
Regardless of Fed action or inaction, bond market participants have moved forward with raising rates for the bulk of 2026.
With this, as the 10-year treasury yield (think interest rate) has marched consistently higher here in 2026, for our part, we have consequently been watching closely the higher-risk segments of the bond market for any signals that they are pricing in downstream economic concerns.
Frankly, as 2026 unfolded, it has been pretty quiet on that front. Nothing to report, that
is, until recently.
The Triple C’s
Within the corporate bond market there are ratings known as CCC-rated bonds. These are issued by companies with weaker financial structures and are considered a higher risk of default on their issued bonds. As a result of this, they have to pay a much higher interest rate to offset their high risk of default.
These are known as the “triple C’s” as a general grouping. We like to offer that even in good economic times they are one misstep away from near catastrophe.
This is where they can be viewed as an early warning sign, like the proverbial canary in the coal mine, as to whether collective bond market participants feel there are increasing risks of economic concerns downstream on the timeline.
As these rated bonds are viewed as high-risk in good economic times, add some economic concerns to the general landscape and in turn collective caution rises notably for this segment as concerns for their ability to meet their bond obligations increase.
While viewing the pricing behavior of these rated bonds as one of many economic signals, we keep a close eye on how they are acting on a price basis. Recent price action has been building to the downside.
The above is a three-year chart for a vehicle that holds CCC-rated bonds. Our first annotation is in early 2025 via our red rectangle.
Back in the spring of ’25, the country was immersed in the implementation of tariffs.
There was an often stated narrative that implementations of broad tariffs would send the U.S. economy into a recession. For its part, the stock market began to sell off rather quickly.
Back then we noted and shared within an edition that it was very curious how the bond market generally, and the above high-risk triple C’s specifically, were dragging their feet in joining in on the “guaranteed recession view” that was so prevalent.
Realizing the smartest market was reluctant to join the stock market in its concerns, we could not help but find that interesting.
When collective markets were at their worst, which for the Dow Jones Industrial Average meant it was down 20% in eight short weeks, the high-risk corporate bond market did finally chime in with a quick dip per our rectangle. As stated, this dip notably lagged the stock market behavior.
As it turned out, no recession occurred with the follow-on months.
Let’s go present-day to the far right of the chart.
We are now seeing notable downside price action in this economically sensitive bond market segment. Interestingly, by-and-large for its part, the stock market, to this point in time, is showing little concern relative to that of the above CCC-rated bonds.
We find it interesting that the smartest market drug its feet to the downside back in early ’25, while the stock market was in an uproar with concern, and now the smartest market is beginning to chirp in earnest relative to concerns of economic issues, and for its part, the stock market is challenged but is not falling apart as it did in early ’25.
This, while risk spreads are chiming in notably
Admittedly, the topic of risk spreads can be a bit confusing. We will keep this very simple, and if it is still confusing, all that needs to be retained is the tremendous upturn in the trend of the risk spread as shown below.
For context, you can calculate and chart a risk spread by taking a vehicle that is viewed as a safe bond investment, like the 10-year treasury note, for example, and calculate the yield difference (think interest rate difference) between it (the safe vehicle) and that of the riskier bond vehicle, such as the CCC-rated bond segment.
If the calculation, when presented as a chart, is trending upward, it means risk spreads are widening, which equates to bond market speak for increased downstream economic concerns.
Widening risk spreads are notable metrics when observing the interactive behavior of bond market segments.
We offer a hat tip to Ron Griess over at the Chart Store for the above graphic.
In the top pane of the chart, the 10-year treasury note, along with the CCC-rate bond segment, is displayed on a yield (interest rate) basis. The lower pane, as offered previously, is the focus, in particular if the topic of risk spreads offers some level of confusion.
Note in the lower pane how the risk spread line is notably increasing and doing so rapidly.
For our part, we added a red horizontal line for emphasis relative to the behavior of this risk spread back in the aforementioned early 2025 period. Via our red line, our current trend easily exceeded the high point level from back in early ’25.
To reiterate, back in ‘25 this segment was reluctant to drop and then finally did which led to a risk spread increase, all while stocks were dropping. We now see these risk spreads widening quickly all while the stock market, generally speaking, sees little forward concerns.
Will the smartest market prove correct again?
To be fair, this edition is offering what we think is an early part of the warning signal from the bond market.
The front-and-center question from this juncture is will this behavior continue in its current direction, and importantly, will additional segments within the bond market begin to chime in with their own increasing risk spread messaging?
The pricing of higher risk bonds along with their risk spread behavior is a key observation point at this time in watching bond market messaging.
Relative to the stock market, let’s not forget that stock prices take a tremendous downside hit whenever economic issues enter the landscape. With this in mind, we offer the above, not as some esoteric topic of bond market speak, but rather as a very important metric to watch for downstream economic signaling.
If the above continues and ultimately points to an inevitable recession, all markets will be impacted, trusting history as our guide. For now, we continue to watch closely.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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