US Corporate Bond Investors Brace for Trade War Turbulence

(Reuters) – Pressure on corporate bond spreads, or the premium paid by companies over risk-free Treasuries, is expected to persist as investors remain cautious about the domestic economic outlook and await the implications of the global trade war. High-yield bond spreads recently peaked at 299 basis points (bps) on Tuesday, marking their widest point since October 2024, before tightening back to 288 bps yesterday, according to the ICE BofA High Yield Index. Currently, these spreads are 31 bps wider since February 18.

Investment-Grade Spreads Widen Amid Trade Tensions

Investment-grade spreads have also widened this week, reaching 89 bps, which is an almost five-month high, before tightening to 87 bps on Wednesday, as reported by the ICE BofA Corporate Bond Index. The recent actions by President Donald Trump, including the imposition of 25% tariffs on Mexican and Canadian imports, a 10% tariff on Canadian energy imports, and a doubling of tariffs on Chinese products to 20%, have heightened concerns among investors.

Expert Insights on Fixed Income Strategies

“This could put pressure on fixed income assets, and we anticipate more spread widening and risk ahead, something we have strategically positioned for by de-risking in recent months,” stated Anrzej Skiba, head of BlueBay U.S. fixed income at Stamford, CT-based asset manager RBC GAM. “We favor short-duration assets, and as volatility increases, we hope to reengage with the asset class at better entry points once the dust settles,” he added.

Market Reactions and Future Predictions

Despite a recovery in U.S. stocks on Wednesday that pushed corporate spreads tighter, investors remain cautious, predicting that spreads could gradually continue to widen in the coming months. This expectation is driven by the potential negative economic consequences of an ongoing or intensifying trade war.

“We’ve seen preloading of corporate inventories ahead of the eventual tariffs, and we’ve observed a rise in consumer savings, which often precedes recessions,” noted Guy LeBas, chief fixed income strategist at asset manager Janney Capital Management. “However, the economy doesn’t move that fast – everything we’re discussing reflects marginal deterioration, and it’s challenging to draw a line through any single data point,” he added.

Impact on Corporate Bond Issuance

Continued economic gloom and widening spreads could significantly impact new corporate bond issuance, particularly from lower-rated issuers, as the cost of capital rises. “A Baa-rated corporate seeking to issue a bond now would need to pay a yield almost double the level from four years ago,” explained David Hamilton, managing director and head of asset management research at Moody’s, in a Tuesday report.

“It’s going to be a bumpy couple of months until we see a conclusion regarding what’s being implemented,” remarked Mike Sanders, portfolio manager and head of fixed income at investment manager Madison Investments. Investors are advised to stay vigilant as the landscape evolves and to consider the implications of these economic factors on their investment strategies.

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