Concerns about economic recession rise, and the spread of U.S. corporate bonds hits a six-month high

As concerns deepen among investors about the potential economic recession triggered by Trump's tariff policies, the volatility in the U.S. corporate bond market has intensified recently.

Data from the Intercontinental Exchange (ICE) shows that the spread between U.S. junk bonds and U.S. Treasuries has risen by 56 basis points since mid-February, reaching 322 basis points, a new six-month high. Meanwhile, the spread for U.S. investment-grade corporate bonds hit 94 basis points on Tuesday, widening by 13 basis points from last month, also marking the highest level since mid-September last year.

The widening corporate bond spread reflects market anxiety

Investors generally view the U.S. corporate bond spread as an important indicator of financial market stress, particularly the yield difference between lower-rated corporate bonds and safe U.S. Treasuries. A widening spread indicates a decreased willingness among investors to hold riskier "junk bonds."

Eric Beinstein, head of credit strategy at JP Morgan, stated:

“The widening credit spreads over the past few weeks have primarily been driven by concerns over a U.S. economic recession and tariff uncertainties. Recently, the sharp declines in tech 'momentum stocks' like Tesla and Palantir Technologies have further exacerbated the downward trend in junk bonds.”

Neha Khoda, a credit strategist at Bank of America, pointed out that although U.S. corporate bonds managed to escape the impact of stock market volatility in February, the "small cracks" that began to appear in March have gradually widened as the stock market struggles continue. She referred to this as a "backlash against the lack of volatility in February."

Inflation concerns and global trade conflict risks drive the trend of widening spreads

Analysts indicate that a series of import tariffs implemented by the Trump administration has raised concerns about global trade conflicts, becoming the latest driver of widening spreads.

According to a Reuters survey conducted last week, 95% of economists in Canada, the U.S., and Mexico believe that the chaotic implementation of Trump's tariffs has increased the risk of economic recession in their respective countries. Andrzej Skiba, head of U.S. fixed income at RBC GAM, warned:

“This will lead to inflation, and the Federal Reserve may not be able to cut interest rates in such an environment. This could put pressure on fixed income assets, and we expect more widening of spreads and risks in the future.”

Goldman Sachs revised its forecast for junk bond spreads this week, expecting them to rise to 440 basis points by the third quarter of 2025, significantly higher than the previously estimated 295 basis points. The firm noted that given the risks of a "significantly deteriorating" economic outlook, spreads remain too low.

Nicholas Elfner, co-head of research at asset management firm Breckinridge Capital Advisors, stated that as the potential inflationary impacts of Trump's economic and fiscal policies become clearer, U.S. corporate bond spreads are expected to widen further. This may enhance the yield attractiveness of corporate bonds to investors, including overseas investors, who have surpassed insurance companies and pension funds in 2024 to become the main force in corporate bond demand. Risk Warning and Disclaimer

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