Macro Notes - Credit Spreads are Tight, but CAD should outperform US
August 22, 2025
There is no denying that spreads for both US and Canadian indices are incredibly tight right now (Chart 1). For context, the US IG index credit spread is currently at 75bps – well tighter than the post-financial crisis average of 128bps. Meanwhile, Canadian credit is currently at 88bps, which is below the long-term average of 126bps.
However, if you have to make a decision between the two, we’d agree with a few of the sharper voices on the street in that CAD credit still provides better value than US credit at this point.
One way to capture this is to normalize current spreads relative to the yield provided. This ratio tells us how much of the index yield is coming from credit risk relative to ‘risk-free’ rates. For the CAD Index, that ratio is about 22% - which is higher than it is for the US Index (15%).
That implies that when you buy a CAD IG corporate bond, a greater percentage of the yield you earn is attributable to the credit risk than it is for the US IG corporate bond. Said differently, most of the ‘value’ in US IG is from the risk-free rate as opposed to credit risk. In fact, the US IG corporate bond spread would have to widen by an additional 35bps to make it as enticing as the CAD Index if we judge purely by the ratio.
Of course, the obvious risk to this is CAD supply – which is expected to increase post-Labour day. But even then, the lack of liquidity in CAD credit means it likely won’t widen by as much as US IG.
Chart 1 – CAD and US IG Credit Spreads Over Time
Source: Bloomberg, BMO GAM
Chart 2 – CAD IG Credit Provides Better Value Than US IG
Source: Bloomberg, BMO GAM