US junk bond spreads surge to 17-month high on trade war fears

By Alden Bentley and Matt Tracy

NEW YORK (Reuters) -U.S. high-yield corporate bond spreads surged to 401 basis points as of late Thursday, their highest since November 2023, as global markets swooned over fears that U.S. President Donald Trump's plan for import tariffs would kick off a trade war.

The options adjusted spread (OAS) on the ICE BofA High Yield Index, which measures the difference in yields between junk bonds and Treasury debt rose from 342 basis points on Wednesday, while spreads on investment-grade bonds rose to 106 bp, the highest since August 2024, from 96 bp.

Junk bond spreads are an important indicator of financial conditions reflecting how much of a premium investors demand to hold debt issued by companies with the lowest credit ratings relative to zero-risk U.S. government debt.

High-yield spreads are still low by historical standards, having risen above 1,000 basis points when the COVID-19 pandemic hit in 2020 and above 2,100 bp as the global financial crisis unfolded in 2008. The spread fell below 300 bp late last year amid market confidence that U.S. economic growth would continue and that Federal Reserve easing indicated inflation was trending lower. That was the narrowest spread since before the financial crisis in 2007.

Junk bond spreads could widen by another 30 bp on Friday and continue to do so through April as investors continue to digest the tariffs and subsequent market movements, according to Guy LeBas, chief fixed income strategist at asset manager Janney Capital Management.

"What sticks out to me is how unusually fast this move is - I would guess this is the most rapid widening since COVID," LeBas said.

"It’s a messy market, and it has a lot of longer-term investors frozen. It’s hard for fundamental and lower frequency traders to respond," he added.

The ICE BofA junk index itself suffered its biggest one-day fall since mid-2022 on Thursday, one of many indications that investors are ditching risky assets and moving into safer assets like Treasuries, where yields, which move in the opposite direction of prices, have plunged this week, helping widen the gap.

The investment-grade corporate bond index of solid credits actually rose on Thursday, which suggests yields fell, but not as much as Treasury yields, according to the widening OAS.

"There is clearly a lot of nervousness broadly reflected in widening credit spreads but at these levels we are also seeing some opportunistic buying," said Scott Schulte, global co-head of investment-grade debt syndicate at Barclays.

"Now with this 15-30 basis points widening, spread buyers are starting to emerge and selectively picking their spots," he added.

U.S. Treasury yields fell further on Friday after China retaliated against Trump's larger-than-expected wall of tariffs with a slew of its own, ratcheting up a global trade dispute and stoking recession fears.

(Reporting by Alden Bentley; Editing by Sharon Singleton, Chizu Nomiyama, Franklin Paul and Diane Craft)