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Donald Trump’s “liberation day” tariff blitz has caused the biggest sale in the US junk bond market since 2020, indicating that a slowdown in the economy will be hit by corporate America among investors.
Premium investors require that they retain speculatively rated corporate liabilities compared to what US government bonds (representative of default risk) provide. This is the biggest rise since the coronavirus caused a widespread lockdown in 2020.
The sale of corporate bonds from Wednesday, when Trump raised tariffs on us to the highest level for more than a century, leaves companies struggling to pay off their debts, underscoring the move to economic production and underscoring investors’ concerns that unemployment will increase, analysts said.
“The credits are clearly a coal mine canary,” said Brian Levitt, Global Market Strategist at Invesco. “Credits tend to go first. If the economy rolls, the possibility of a recession is picked up and then the spread is blown away.”
On Friday, JPMorgan cut its US economic forecast, forecasting a 0.3% contraction in 2025. He also said the unemployment rate would rise to 5.3% from 4.2% in March.
Companies in the household goods, retail and auto parts sectors are among the hardest hit by low-rated debt.
This pain was the most severe in the weakest pockets of the high yield market. The average spread for debt ratings was above 10% points for the first time in about eight months.
“The most annoying thing about junk (IS) is low performance,” said Eric Winograd, Chief Economist at Alliancebernstein.
Low-rated companies “have a weaker credit basis,” said Torsten Slok, Apollo chief economist.
“They just don’t have a buffer of shocks coming,” Sloak said. “If the economy is slowing, then (they) will of course become more vulnerable.”
According to analysts who also highlighted energy companies, retailers and automakers with overseas supply chains were among the sectors facing the most pressure.
Janus Henderson’s portfolio managers Brent Olson and Tim Winstone pointed to high-yield bonds issued last month by online retailer Wayfair. In 2030, yields on mature bonds have recently jumped from around 8% to around 10%. Wayfair declined to comment.
Another investor highlights Staples from Michael’s and Office Surprise Company. The low-value obligations issued in both names have been under pressure since Wednesday. Analysts at JP Morgan noted that an estimated 60% of Michael’s products originated from China or other countries in Southeast Asia, and now faces heavy tariffs.
The portfolio manager described the 2029 Saks bonds as “big, liquid, stressful bonds” and “good agent” of the market’s problem points. Department Store Group bond yields moved from under 17% to over 19% between Wednesday and Friday.
John McClain, credit portfolio manager at BrandyWine Global Investment Management, said this week that he “gets more than the worst scenario” from the White House. “You have uncertainty, you have escalations, and that continues to lead to relicating wholesale risk.”
