Impact of Tariff Increases on the US Junk Bond Market

The US junk bond market is experiencing its most significant sell-off since 2020, following Donald Trump’s recent announcement regarding tariff increases—termed “liberation day”—which has raised concerns among investors about a potential slowdown in the economy.

Market Reactions and Investor Sentiment

According to ICE BofA data, the premium that investors require to hold speculative-rated corporate debt over US government bonds—often viewed as a measure of default risk—has risen by one percentage point to 4.45 percentage points. This change is the most substantial since the widespread economic lockdowns triggered by the COVID-19 pandemic in 2020.

This downturn reflects apprehensions that the new tariffs could adversely impact economic growth and increase unemployment rates, thereby compromising the ability of weaker companies to meet their debt obligations. Brian Levitt, a global market strategist at Invesco, remarked, “Credit is obviously a canary in the coal mine. Credit tends to go first . . . if the economy’s going to roll over, the odds of a recession pick up and then you’re going to see spreads blow out.”

Revised Economic Forecasts

In light of these tariff changes, JPMorgan has revised its economic predictions, forecasting a contraction of 0.3 percent in 2025, markedly down from its earlier estimate of 1.3 percent growth. Additionally, the bank anticipates an increase in the unemployment rate from 4.2 percent in March to 5.3 percent.

Sectors Under Pressure

Several industries are being significantly affected by this sell-off, particularly those involving household goods, retail, and automotive parts. Analysts have noted that the most severe impacts are felt among lower-rated companies, particularly those reliant on international supply chains.

For example, the spread on debts rated triple-C and below exceeded 10 percentage points for the first time in eight months, indicating severe strain. Eric Winograd, chief economist at AllianceBernstein, indicated that the “junkiest of the junk stuff [is] underperforming.” Furthermore, Torsten Slok, chief economist at Apollo, noted that lower-rated companies “have weaker credit fundamentals,” rendering them more vulnerable in a slowing economy.

Highlighted Case Studies in High-Yield Debt

Specific examples illustrate the tightening conditions in the market:

• Wayfair: A bond issued by the online retailer saw its yield rise from approximately 8 percent to about 10 percent recently due to significant reliance on Asia for product supplies, making it sensitive to the new tariffs.
• Michael’s and Staples: Low-rated debts from these companies have faced increased pressure since the tariff announcement, with an estimated 60 percent of Michael’s goods sourced from countries now facing steep tariffs.
• Saks: The bond yield for this department store group shot up from under 17 percent to over 19 percent in just a few days, described as a “big, liquid, stressed bond” by a portfolio manager seeking to gauge market stress points.

Conclusion: A Repricing of Risk

As investors react to escalating economic uncertainty, John McClain, credit portfolio manager at Brandywine Global Investment Management, commented, “We got more than a worst-case scenario from the White House this week,” highlighting the cascading effects of these policy changes. The ongoing adjustments in corporate bond pricing signify broader concerns regarding economic resilience in the face of potential headwinds.