No new offerings were announced in the U.S. investment-grade and high-yield bond markets for the third consecutive day as credit spreads, or the cost of issuance, continued to increase on worries that U.S. President Donald Trump's tariff war could lead to a recession.
Since Trump imposed sweeping tariffs on U.S. imports on Wednesday, credit spreads, which are the premium companies paid on bonds over Treasuries, have widened sharply to two-year lows.
The average investment-grade spreads were at 114 basis points on Friday, the latest available data, or 18 bps wider since last Wednesday, the widest they have been since November 2023.
The average high-yield spreads at 445 bps have widened 103 bps since Wednesday and are now also at the widest level since November 2023, according to ICE BAML data. (.MERC0A0), (.MERH0A0)
IG spreads were an additional 3 bps wider on Monday morning, said BMO Capital Markets credit strategist Daniel Krieter in a note.
Guy LeBas, chief fixed income strategist at Janney Capital Management, said he expected to see some dip buying to emerge at some point if equity markets show signs of recovering from the recent selloff.
"These are just sloppy, sloppy markets that don't follow any measure of fundamentals or technical," he said. "There are some random spurts to the upside which, if sustained, could push high-yield spreads to end tighter on the day by about 7-8 bps," he added.
The halt in issuance followed a period last month when, for the first time since the pandemic, companies struggled to issue bonds at the price they wanted - a situation that continued on Monday, two bond syndicate bankers said.
There were a few companies that looked early to issue bonds, but they decided not to go ahead as continued market volatility meant they were unsure demand would be enough to support issuance without being asked to pay a massive premium, said one syndicate banker who preferred to be unnamed.
"The most pressing question at this point is obviously what would begin to turn the narrative and give risk assets some respite from the aggressive selling of the past few sessions," said Krieter.
A softening in tone on tariffs from the Trump administration or more urgency to negotiate with U.S. trading partners would help, "though the weekend’s developments don’t provide much hope for either outcome in the near term," he said.
If high-yield bond spreads continue to widen, the global default rate could surpass 8% in a year's time from less than 5% today, said Sharon Ou, vice president and senior credit officer at Moody's Ratings.
Mike Sanders, head of fixed income at Madison Investments, said corporate credit spreads had a widening bias, but he expects signs of stability to first emerge in high-grade bonds.
The last investment-grade bond to price last Wednesday was issued by the financing arm of Holcim (HOLN.S), which raised $3.4 billion in a four-tranche offering, and spreads on those bonds were bid 10-15 bps wider on Monday, said Sanders. The spreads on some other highly rated 10-year bonds from Home Depot (HD.N) and Coca-Cola (KO.N) were quoted 15-20 bps wider, he added.
