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A Key Leading Indicator : The Reversal in the Option Credit Spread


The ICE Option Adjusted Credit Spread has reached complacency (i.e. concerning for contrarians) levels last seen since in 1997-1999 and 2005-2008 periods. In both of these periods, a REVERSAL of this credit spread index at its lows (as opposed to simply REACHING the lows) has been LEADING a significant market correction by a 6 month (2007) to 24 month (1998) period. Note that the 2020 COVID correction and the 2025 Trump Tariffs correction did not benefit from any reversal warning signs but they occurred when the spread's volatility reached very low levels for 6 to 8 months on average.


We haven't seen a reversal in the index at its lows yet.


The ICE Option-Adjusted Spread (OAS) is the ICE BofA index spread between a bond's calculated OAS and a spot Treasury curve, adjusted for the bond's embedded options, like those found in callable bonds or mortgage-backed securities. It provides investors with a more accurate way to compare the relative risk and value of bonds with embedded options by assessing their yield against risk-free Treasury yields, factoring in the impact of these options on future cash flows.


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