US Junk Bonds Decline Amid Tariff Concerns

The U.S. junk bond market is experiencing mounting pressure as concerns grow over the economic impact of recent trade policies. The additional borrowing cost for junk-rated U.S. companies relative to U.S. Treasury bonds (called credit spread) has surged by 0.56 percentage points since mid-February, reaching a 6 month high of 3.22 percentage points, according to data from Intercontinental Exchange. 

Investor sentiment has shifted due to fears that the aggressive trade policies introduced by Donald Trump could slow economic growth. The imposition of tariffs on key U.S. trading partners has introduced uncertainty in the market, affecting both businesses and stocks. A recent Reuters poll found that 95% of economists across North America believe the risk of a recession has risen due to the uncertainty surrounding trade policy. 

This shift follows a strong rally in the high-yield corporate bond market, previously driven by economic strength and record stock market highs. However, recent market volatility has led to a widening of credit spreads. 

Despite the recent increase in spreads, both investment-grade and high-yield bonds remain relatively stable by historical standards. However, investment banks report that investors have become more selective, walking away from deals they perceive as overpriced. As credit markets adjust to these evolving conditions, investors and businesses must remain vigilant in assessing risks and opportunities in corporate debt markets.

Author: Ahmed Almuhr