Of course, there’s a risk that spreads could widen. We saw this in April when credit spreads blew out temporarily in reaction to new tariffs. But the sector was resilient, and spreads eventually retreated. This highlights both the sticky nature of spreads, which can stay range bound for extended periods, and the solid fundamentals of today’s high-yield market.
That said, we think spreads may widen as short rates rally on Fed rate-cut expectations. But because high-yield bonds would likely benefit from the rate rally, high-yield bond prices could rise even as spreads widen. Lastly, trade-related headline risks aren’t going away soon, and we anticipate continued spread volatility accordingly.
We expect yields to provide ample cushion against the negative price effects of spread widening, underscoring the high-yield market’s resilience.
Trade Uncertainty Has Led to Corporate Belt Tightening
Beyond upending the financial markets and keeping US trading partners guessing, trade uncertainty has had the unintended effect of strengthening corporate balance sheets. Because it’s difficult to budget against a chaotic backdrop, high-yield issuers have chosen instead to bolster working capital and keep debt levels manageable as they wait to see how the tariff and trade picture settles.
This more conservative fiscal approach is reflected in both the limited volume of net new issuance in the European and US markets and issuers’ use of proceeds. An explosion of new issuance would be concerning—both to us and to the markets—particularly if it were used to finance leveraged buyouts and M&A activity. But that’s not what we’re seeing.
Instead, new issuance has largely involved rolling over debt and refinancing (Display)—benign corporate actions that have kept spreads sticky and the high-yield universe relatively clean. Even in the event of an external shock, we wouldn’t expect the high-yield markets to buckle, because market excesses have largely been wrung from the system.
