Since last November’s US presidential election, financial markets have been divided on the issue of tariffs. Were they simply a tool the administration would use to negotiate more favorable trading terms? Or were they part of an audacious agenda to reset the landscape of global trade, even at the risk of damaging the economy?
Investors had initially been assigning a near zero probability of the latter scenario. The S&P 500 touched an all-time high on February 19, and the spread-to-worst on the ICE BofA U.S. High Yield Index (the “U.S. High Yield Index”) tightened to near-record levels of 279bps.
As the administration ratcheted up its rhetoric, markets began to waver. From February 19 through April 2, the S&P 500 declined 7.5%, mostly driven by weakness in large-cap technology stocks. The softness in high yield was modest by comparison: the U.S. High Yield Index declined 0.29%, with spreads widening from 286bps to 364bps.
Nervousness turned into fear following April 2nd “Liberation Day” when President Trump unveiled a 10% levy on all exports to the US and additional “reciprocal” tariffs, to which China promptly retaliated. The April 2nd announcement has sowed enormous confusion and uncertainty. The tariffs themselves are difficult to quantify for most companies due to complex supply chains. Predicting additional levies and potential retaliation by the EU and others is nearly impossible.
According to Bloomberg, the S&P 500’s 10.5% drawdown on April 3–4 marked the fourth worst two-day performance since World War II — trailing only the 1987 crash, the 2008 financial crisis, and the 2020 COVID panic.
Since February 19, all US high yield sectors are negative, with most declining roughly in line with the 2.6% decline of the broader U.S. High Yield Index.
There have been outliers. Economically sensitive sectors, as well as those most exposed to potential tariffs — such as Energy, Transportation, and Retail — have been the worst performers. Energy is especially notable for high yield, as it represents 11.3% of the U.S. High Yield Index and has been hit hardest in recent weeks. Since April 1, WTI crude has plunged from $71 to $59, driven by a combination of demand destruction and oil production increases from OPEC.
In contrast, higher-quality, domestically oriented sectors such as Utilities, Healthcare, and Defense have fared better.
Despite the market volatility, trading in high yield has remained orderly, but elevated. According to JP Morgan and TRACE data, daily trading volumes for high yield increased about 60% on April 3 and April 4 compared to this year’s average. In early March, there were market rumors of some hedge fund “pods” who were pulling back from high yield, but there has been little evidence of forced selling, even on April 3rd and 4th.
The technical backdrop for high yield remains supportive. Retail flows have been modest, with mutual funds and ETFs experiencing only approximately $2.0 billion of outflows (or less than 1% of the market) from April 3 to 4. On the supply side, new issue activity has ground to a halt, with no new high yield deals priced during that two-day period
The recent selloff has improved high yield valuations. Spreads have widened from historically tight levels and are closer to their long-term historical average of 450 bps – the U.S. High Yield Index spread-to-worst currently stands at 462bps
The probability of a US recession has increased since the beginning of the year. However, we believe high yield defaults are likely to remain historically low - absent a severe recession – due to the market’s strong credit fundamentals. BB bonds comprise 53% of the market, and over 25% of the market is secured debt. In our view, high-yield credit trends remain advantageous with more upgrades than downgrades and low leverage ratios compared to historical averages.
Figure 1: Spread to Worst
Index: ICE BofA US High Yield Index
As of April 4, 2025
Source: ICE Data
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High yield securities have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility.
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The following indices may be referred to in this document:
ICE BOFA US HIGH YIELD INDEX
The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch) and an investment grade rated country of risk (based on an average of Moody’s, S&P and Fitch foreign currency long term sovereign debt ratings). In addition, qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $100 million. Original issue zero coupon bonds, "global" securities (debt issued simultaneously in the Eurobond and U. S. domestic bond markets), 144a securities and pay-in-kind securities, including toggle notes, qualify for inclusion in the Index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. DRD-eligible and defaulted securities are excluded from the Index.
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