We present a new theoretical model that sheds light on how CDO tranche spreads vary through macroeconomic and credit cycles. In the model, a credit rating agency (CRA) produces ratings by conducting a noisy investigation procedure to maximize the proportion of firms with high ratings (Bayesian persuasion) but still ensure that firms choose lower risk projects. In a recession, the higher volatility of fundamentals implies that debt issued in booms may not be incentive compatible with low-risk behavior, which the CRA responds to by increasing the precision of ratings. Firms with good ratings can lower their cost of financing by choosing low risk projects, calling existing bonds, and issuing new ones. However, refinancing may not be possible during a credit crunch, and hence the resulting high risk strategy by firms in such periods implies that senior tranches, which are nearly riskless at the time of issuance, get seriously impacted. We structurally estimate the parameters of our macro-finance model and find that the model is able to explain a substantial proportion of the historical variation in CDO tranche spreads.