Like the US stock market, the junk bond market is also "very optimistic" about the US economy
In the context of uncertain economic prospects in the United States, the junk bond market is sending optimistic signals, with spreads falling to a historical low of about 2.88 percentage points, indicating strong investor confidence. Nicholas Colas of DataTrek Research pointed out that the optimism among bond investors is similar to that in the U.S. stock market, and the low spreads suggest that a recession is not anticipated. The junk bond market performed well, with the iShares iBoxx and SPDR Bloomberg High Yield Bond ETFs achieving total returns of 5% and 4.8%, respectively, in the first half of 2025. Although tariff policies have raised concerns, industry insiders believe that their impact is manageable
Amid the uncertainty of the U.S. economic outlook, the junk bond market (i.e., high-yield corporate bonds) is sending the same optimistic signals as the U.S. stock market.
Latest data shows that the spread between U.S. junk bonds and Treasury bonds has fallen to a historical low, currently around 2.88 percentage points, the lowest level since 2021, just slightly above the low point in January of this year, indicating that investors' confidence in the economic outlook remains strong.
Nicholas Colas, co-founder of DataTrek Research, stated that this phenomenon reflects the same optimistic sentiment as the U.S. stock market, considering that bond investors are typically more conservative than stock market investors, this is a bullish signal for the stock market.
Strong Performance of Junk Bonds Indicates High Economic Confidence
A low spread typically means that investors do not expect the economy to fall into recession, even though the recent tariff policies implemented by the Trump administration have caused market volatility.
In a report on Tuesday, Nicholas Colas pointed out that in 2021, due to strong fiscal and monetary support during the pandemic, U.S. economic confidence was very high, and the current narrowing of the spread reflects a similar sentiment.
The strong performance of the junk bond market in the first half of 2025 further corroborates this optimistic attitude.
According to FactSet data, the iShares iBoxx U.S. Dollar High Yield Corporate Bond ETF achieved a total return of 5% in the first half of the year, while the SPDR Bloomberg High Yield Bond ETF (JNK) gained a total return of 4.8% during the same period, with the latter achieving a monthly return of 2% in June, marking the best monthly performance since July 2024.
Michael Chang, head of high-yield credit at Vanguard and senior portfolio manager, stated that June was an "excellent month" for high-yield bonds.
Limited Impact of Tariffs, Junk Bond Market "Cloudy but Not Stormy"
Despite concerns over tariff policies, industry insiders believe their impact on the U.S. economy is manageable.
Chang stated in a media interview that the ultimate impact of tariffs will not trigger a recession in the U.S. economy. He noted that if a scenario arises that could lead to a recession, the spread of junk bonds may widen, affecting returns, but currently, the market does not show such signs.
Chang also acknowledged that high-yield bond spreads are generally "tight," and corporate credit valuations "look quite tight overall." He believes that in the case that the U.S. may avoid an economic downturn, the spreads of junk bonds may remain low for some time:
"The sky is cloudy, but not stormy."
"The economy may slow down due to tariffs, but it won't reach the level of recession. This is acceptable for high-yield bonds."
Currently, the annual yield of the U.S. junk bond market is about 7%, although it will fluctuate with changes in spreads. Chang pointed out that compared to the period before the 2008 global financial crisis, the current U.S. high-yield bond market is composed of higher-quality credit overall Due to the potential impact of tariffs not yet fully realized, Chang maintains a cautious attitude towards the retail sector, as it faces exposure to taxation. He expects that as the market absorbs more tariff news in the coming days, "increased daily volatility would not be surprising."
Chang also mentioned that he is optimistic about domestically oriented defensive high-yield sectors, such as healthcare, food and beverage, and utilities, to avoid potential volatility brought by tariffs.
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