Credit Fear Gauges Soar Most Since Banking Meltdown in 2023
(Bloomberg) — Gauges for credit risk are signaling just how nervous investors are getting about what Bank of America Corp. analysts described as “the biggest shock to global trade in modern times.”
US President Donald Trump’s sweeping tariffs sent indexes that track credit-default swaps surging by the most since March 2023 in both the US and Europe. The CDS contracts are used to hedge against the risk of default. The Markit CDX North American Investment Grade Index, the most active CDS contract in the world, jumped as much as 8.5 basis points to 75.7 basis points, according to prices compiled by Bloomberg.
CDS indexes are a popular way of hedging risk because they tend to be more liquid than regular “cash” bonds, and an easy way for traders to reduce or add risk quickly.
Credit concerns intensified a day after US junk-rated bonds led the biggest slump in global high—yield debt since 2020. The extra yield, or spread, investors demand to own the risky debt instead of Treasuries widened 45 basis points Thursday to 386 basis points. Junk bonds are particularly sensitive to economic shifts, and would be most vulnerable to severe losses or defaults should conditions deteriorate.
“If the economy was to slow down due to ongoing commercial tensions, we could expect spreads to widen further, and conversations about more defaults start emerging again,” said Raphael Thuin, head of capital market strategies at Tikehau Capital.
Most financial markets underestimated the magnitude of tariffs unveiled on Wednesday, JPMorgan Chase & Co. credit strategists Eric Beinstein and Nathaniel Rosenbaum wrote in a note Friday. The levies, if implemented, may push the US and global economy into recession this year, they wrote. They widened their spread projection for the JPMorgan US Liquid Index by 35 basis points to 125 basis points.
“Everything is on the table now, including a recession,” wrote the analysts.
Related: Credit Markets Shudder as Tariff Shock Sparks Reckoning
Bonds Drop
Junk bonds in Europe dropped on Friday. Auto suppliers led the move downwards, with Nanterre-based Forvia SE’s euro bond due June 2031 posted its biggest fall on record, according to Bloomberg-compiled prices. Schaeffler, ZF Friedrichshafen AG and Standard Profil Automotive GmbH also saw their bond prices drop sharply on the day.
The declines within the European junk-rated index were led by the companies most affected by tariffs, but also by the worse-quality names that had already sparked investor concerns.
Among the biggest losers were EQT’s French laboratories business Cerba, as well as Emeria, a real estate company. Both have already been under the spotlight because of their heavy debt piles.
In another sign of the weakness in the market, Blackstone Inc. retained the riskiest portion of a UK commercial mortgage bond, which was previously up for sale. It also sweetened the pricing on some of the other parts, with the BB rated tranche widening by more than 100 basis points from initial talk price.
In the US, bonds from companies in the energy sector fell most after oil prices hit a four-year low. It was the worst-performing part of both high yield and investment grade, data compiled by Bloomberg show. Refining company PBF Energy’s 7.875% notes due 2030 slumped as much as 8.375 cents to 75.5 cents on the dollar, the lowest on record, according to Trace pricing data.
US junk bonds of liquefied natural gas company New Fortress Energy extended losses Friday. Its 6.5% notes due 2026 fell as much as 10.5 cents to 67 cents on the dollar, also the lowest on record, Trace data shows.
Other sectors are getting hammered too, including retailers such as Saks Global Enterprises. Its 11% bonds due 2029 dropped as much as 5 cents on the dollar to a record low of 71.5 cents, according to Trace.
More defaults
Junk credit markets had been relatively insulated from the pain being felt in stocks as concerns rose over the impact of trade levies on the global economy. Investors argued that the hefty yields on offer in a high-rate environment offered protection from the worst of the volatility. However, the tariffs sent shock waves through global markets on Thursday, with the S&P 500 suffering its worst trading session in five years and junk bond spreads spiking globally, but most notably in the US.
The risk of a trade war is also rising as countries decide how to respond to the levies. China plans to impose a 34% tariff on all US goods from April 10, according to local reports. And the risk of a recession in the US have risen to at least 50%, Apollo Global Management Inc. President Jim Zelter said on Thursday while money markets have increased their expectations for rate cuts there.
“Everyone is stunned by what is happening,” Benjamin Sabahi, head of credit research at Spread Research. “The consequences generally speaking for the credit market is that inflation is likely to be back and revenues expectations adjusted downward at issuer level.”
–With assistance from James Crombie, Gowri Gurumurthy, Aaron Weinman, Carmen Arroyo and Neil Callanan.
(Adds UK Logistics details in 11th paragraph, updates bond prices starting in 13th paragraph.)
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