JCB find the YieldReport to be an invaluable summary of all debt market activity. Whilst we are focussed on the highest grade bonds it is important to see what is..Angus Coote, Executive Director, JCB Active Bond Fund
US investment grade corporates gained 0.28% over the course of the week while, not unexpectedly, high yield bonds declined -2.6%. High yield bonds extended a selloff Friday after China retaliated against US President Donald Trump’s latest tariffs and Federal Reserve Chair Jerome Powell signalled no hurry to lower interest rates. The extra yield investors demand to own high yield bonds over Treasuries widened a further 39 bps Friday to 4.24 percentage points. That’s the highest level since November 2023, and comes a day after the biggest jump in spreads since March 2020.
More significantly was the spread widening. U.S. high-yield corporate bond spreads surged to 401 bps as of late Thursday, their highest since November 2023. Widening in the US investment grade market was more orderly but still material rising to106 bps, the highest since August 2024, from 96 bps. For context, many believe spreads around 400bps indicate recession anticipation, and in 2022, amid peak concerns about high rates, spreads widened to 500bps.
Talk about steep reversal. Spreads had been at historically lows and a widening was always a clear and present danger. They were so due to a combination of strong US corporate balance sheets and strong technicals, with significant excess demand for bonds. Nothing appeared to be able to upset this status quo bar a Grey Swan event. Well, that Grey Swan event just transpired and wasn’t the increase in spreads brutal, particularly in High Yield.
Additionally, underscoring the nervous sentiment, Trump’s tariffs have brought U.S. investment-grade bond issuance to a screeching halt this week, although market stress had already been apparent over the past month as jittery investors pushed back on pricing. Since Trump imposed sweeping tariffs on U.S. imports on Wednesday, no new bonds have been priced by investment-grade companies.
If the announced tariffs are maintained, and that is the key issue, they pose significant stagflation risks in the US and downside growth risks globally. The lasting macro and market implications will depend on various factors, including the duration of proposed tariffs, retaliatory actions, and fiscal support offsets.
By some estimates US core PCE inflation could rise by nearly 2% from 2.8% today to almost 5%, while growth could face a hit of 1-3% depending on the potential fiscal cushion. The tariffs represent a significant hit to US consumer purchasing power, which may create political pressure for fiscal support. However, if this requires Congressional approval, the timeline may misalign with the peak economic impact.
Given the macro backdrop, rating implications (downgrades) may come from near-term changes in market conditions. The worsening of global trade tensions, expectations for a global economic slowdown, and increased investor risk-aversion will likely affect expectations of a continued gradual decline in speculative-grade defaults.
