US junk bond spreads to widen more if recession fears persist

The credit spread for junk bonds, the premium companies pay over risk-free Treasuries, recently widened to the most in six months and could rise further as investors worry about how a global trade war could hurt the U.S. economy, investors and analysts said on Monday.

Last Thursday, U.S. junk bond spreads touched 340 basis points (bps), the widest spread since Sept. 11, 2024, according to the ICE BofA High Yield Bond Index. The spread hit a previous six-month high of 322 bps on March 11.

Investors generally use bond spreads to measure financial market stress, especially the gap between yields on ultra-safe U.S. government debt and bonds issued by companies with low credit ratings. When the spread widens, it shows less willingness to hold riskier “junk” bonds.

Junk spreads tightened 22 bps to end the week on Friday at 318 bps. Analysts and investors alike forecast spreads could widen further in the coming weeks and months, as the economic and political impacts of President Donald Trump’s import tariffs become clear.

The spread widening “follows a tremendous increase in economic policy uncertainty predominantly on tariffs that, as we saw Friday, led to a surprising drop in consumer confidence and spike in long run inflation expectations,” noted Hans Mikkelsen, managing director of credit strategy at TD Securities, in a Monday report.

“We think this is just getting started, and will get worse before it gets better,” Mikkelsen added. He forecast junk bond spreads to trade anywhere between 300 bps and 400 bps in the near-term.

A Reuters poll this month found 95% of economists across Canada, the U.S. and Mexico thought the risk of a recession in their respective countries had increased following Trump’s tariff rollout.

On Sunday, Trump told reporters he remained firm in his intent to impose reciprocal and sectoral tariffs on various countries come April 2.

“If there’s more discussions of retaliatory tariffs, I could see spreads moving wider,” said Mike Sanders, portfolio manager and head of fixed income at Madison Investments.

The spread widening was not yet a sign of alarm, as it followed unprecedented tightening over the last year.

Late last year, junk spreads contracted to around 250 bps, their lowest since 2007 before the financial crisis, when spreads blew out to more than 2,000 bps. They were well above 350 bps for most of 2022 and 2023, according to the ICE BofA High Yield Index.

If investors remain worried about a possible recession and global trade war, analysts forecast a drop in U.S. corporate bond supply and demand in the coming months.

“High-yield issuance markets are shrinking already, and most of the net new funding is coming from private credit,” said Guy LeBas, chief fixed income strategist at asset manager Janney Capital Management.

“If we see spreads north of 400 bps in high-yield, issuance slows to a crawl.”

No new high-yield bond deals priced on Monday. Total new deal volume of $12.2 billion in March so far compares to $18.7 billion in February and $23 billion in January, according to a Tuesday JPMorgan report. (Reporting by Matt Tracy; editing by Shankar Ramakrishnan and David Gregorio)