US corporate bond spreads hit widest in about 6 months on recession fears

The spreads between the yields on corporate bonds and US Treasuries hit their widest since September this week, pointing to mounting investor worries about recession and a global trade war.

US investment-grade bond spreads hit 94 basis points on Tuesday, their widest level since Sept. 18, according to the ICE BofA Corporate Index. Junk bond spreads widened to 322 bps, also their widest since Sept. 18, according to Tuesday’s late update of the ICE BofA High Yield Bond Index.

Investors consider US corporate bond spreads a good gauge of financial market stress, especially the gap between yields on bonds issued by companies with poor credit ratings and ultra-safe US government debt. When the gap widens it shows less willingness to hold riskier “junk” bonds.

The widening in spreads comes as the latest sign of growing anxiety about the economic outlook following a series of import tariffs imposed by the Trump administration that raised the specter of a global trade war.

“This will be inflationary, and the Fed won’t likely be able to cut rates in this environment,” said Andrzej Skiba, head of BlueBay US fixed income at RBC GAM. “This could put pressure on fixed income assets, and we see more spread widening and risk ahead.”

A Reuters poll last week found 95% of economists across Canada, the US, and Mexico said the risk of a recession in their respective countries had increased following Trump’s chaotic tariff implementation.

“The escalation of tariff hostilities and re-rating in Tech sector valuations is causing contagion from stocks to credit in a way not observed in a while and is stoking fears that the economy could veer off the tracks,” Societe Generale analysts wrote in a Wednesday note.

The junk bond spread has opened up by 59 bps since a recent low on Feb. 18, JPMorgan analysts noted on Wednesday. They added that junk spreads are “biased wider” over the coming months, due to “vast macro uncertainty” surrounding trade policy, inflation and recession.

Corporate bond spreads are still tight on a historical basis, the analysts noted. Junk spreads late last year contracted to around 250 basis points, the lowest since 2007, before the Financial Crisis, during which they blew out to more than 2,000 basis points or twenty percentage points. They were well above 350 bps for the majority of 2022 and 2023, according to the ICE BofA High Yield Index.

Nicholas Elfner, co-head of research at asset manager Breckinridge Capital Advisors, said that as the impacts of President Trump’s potentially inflationary economic and fiscal policies become clearer, US corporate bond spreads are expected to widen further.

This should bolster the yield allure of corporate debt for investors, including from foreign investors, who overtook insurers and pension funds in 2024 in demand for corporate bonds, Elfner said.

(Reporting by Matt Tracy; Editing by Alden Bentley, Chizu Nomiyama, Alexandra Hudson, and Diane Craft)