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Investors are souring on America’s riskiest corporate borrowers as fears deepen that Donald Trump’s aggressive trade agenda is slowing growth in the world’s largest economy.
The gap in borrowing costs between junk-rated companies and the US government has jumped by 0.56 percentage points since the middle of February to a six-month high of 3.22 percentage points, according to a closely watched index collated by Intercontinental Exchange.
The pressure on the junk bond market comes as Trump’s chaotic rollout of tariffs on the US’s biggest trading partners has alarmed businesses and rattled stocks.
The reversal in investor sentiment follows a prolonged rally in the riskiest part of the corporate bond market fuelled by a buoyant US economy and record highs for stocks.
“Credit spreads have widened over the past couple of weeks, driven by fears over a US recession and tariff uncertainty,” said Eric Beinstein, head of US credit strategy at JPMorgan.
Investors and analysts said that steep declines in some of the most highly valued tech stocks, including Palantir and Tesla, had also chilled appetite for the debt of the riskiest corporate borrowers.
Neha Khoda, a credit strategist at Bank of America, said that junk bond investors were no longer able to shrug off the declines in equities after they accelerated in March. The S&P 500 has fallen 6 per cent, putting it on track for its worst month since 2022, and the tech-heavy Nasdaq is down 6.4 per cent.
The increase in the spread, or the extra yield investors demand to own US junk bonds over Treasuries, this month is “payback for the lack of movement in February”, said Khoda.
Federal Reserve chair Jay Powell last week played down concerns over growth, saying the economy remained in “good shape”. But Powell acknowledged that the central bank was “focused on separating the signal from the noise” amid the turmoil from tariffs.
Analysts at Goldman Sachs this week raised their forecast for junk bond spreads at the end of the third quarter to 4.4 percentage points, up from 2.95 percentage points previously. The Wall Street bank noted that spreads were still too low given the risks of a “significant deterioration” in the economic outlook.
High-grade US corporate bonds have also come under selling pressure. The spread on the Ice index tracking investment-grade debt has risen 0.13 percentage points over the past month to 0.94 percentage points, the highest level since the middle of September.
Despite the recent rises, spreads on both investment-grade and junk bonds remain low by historical standards. But bankers say the recent tumult has prompted investors to be choosier on corporate bond deals.
“Investors are walking away from transactions quicker if they think they’re priced too tight,” said Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo.
A steadier performance in European credit markets this year had also led to some US groups issuing debt in euros rather than dollars, Beinstein said. There has been $37bn in “reverse Yankee” issuance this year, on track for the biggest first quarter for such deals since 2020.
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