US corporate bond investors cautiously navigate trade war uncertainty

Matt Tracy

Thu, Mar 6, 2025, 8:54 AM 2 min read

By Matt Tracy

(Reuters) - Pressure on corporate bond spreads, or the premium paid by companies over risk-free Treasuries, to widen will likely persist as investors grow cautious of the domestic economic outlook and await the implications of the global trade war.

High-yield bond spreads hit a peak 299 basis points (bps) on Tuesday, their widest since October 2024, before tightening back in yesterday to 288 bps, according to the ICE BofA High Yield Index. They are currently 31 bps wider since February 18.

Investment-grade spreads similarly widened this week to 89 bps, also an almost five-month wide, before tightening in to 87 bps on Wednesday, according to the ICE BofA Corporate Bond Index.

Bond investors pointed to the trade war launched on Tuesday by the Trump administration as the biggest reason for spread widening this week.

President Donald Trump imposed 25% tariffs on Mexican and Canadian imports, levied 10% tariffs on Canadian energy imports, and doubled his tariff on Chinese products to 20%.

"This could put pressure on fixed income assets, and we see more spread widening and risk ahead, something we positioned our strategies for having de-risked in recent months," said 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 picks up, we hope to reengage with the asset class at better entry points once the dust settles," he added.

Though a recovery in U.S. stocks on Wednesday pushed corporate spreads tighter, investors anticipate spreads could gradually continue to widen in the coming months, as the negative economic consequences of an ongoing or even intensifying trade war make themselves apparent.

"We've seen preloading of (corporate) inventories ahead of the eventual tariffs, and we've seen consumer savings rise, which are often a presage to recessions," said Guy LeBas, chief fixed income strategist at asset manager Janney Capital Management.

"But the economy doesn't move that fast - everything we're talking about is marginal deterioration, and it's hard to draw a line through any one datapoint," he added.

Continued economic gloom and widening spreads could put a significant dent in new corporate bond issuance, particularly from lower-rated issuers, as the cost of capital increases.

“A Baa-rated corporate seeking to issue a bond now would need to pay a yield almost double the level four years ago," said David Hamilton, managing director and head of asset management research at Moody’s, in a Tuesday report.