By Naomi Rovnick, Harry Robertson and Sinead Cruise
LONDON (Reuters) – The tariff shock and recession fears that have sent world stocks into a tailspin over the last week are rolling into corporate funding markets, raising the cost of borrowing and disrupting financing plans even for lower-risk companies.
With U.S. Treasuries nursing huge losses on Wednesday – the strongest sign yet that stress is impacting so-called safe-haven assets – attention has now turned to the $35 trillion global corporate bond market, which has swelled by around 40% since 2008 as companies gorged on cheap debt, OECD data shows.
The premium investors demand to hold low-rated corporate credit versus government debt has soared by 100 basis points in a week, the biggest short-term move in so-called global junk bond spreads since the U.S. regional banking crisis in March 2023.
The move is fuelling fears pension funds and other longer-term investors might also start purging higher-quality borrowers from their portfolios. With the majority of fixed-income trading happening off-market, it can be hard to track and measure sales.
But the sharp dip in sentiment is far easier to discern. An index measuring the cost of insuring against debt defaults by Europe’s strongest businesses hit its highest since late 2023 on Wednesday.
Germany energy group RWE, which has an investment grade rating, was among companies that have been affected by the turmoil. Even though it hired banks to issue a green bond last month, it was unable to launch the sale amid the tariff news and ensuing market volatility, two people familiar with the matter said. RWE declined to comment.
In Japan, three companies have postponed the sale of 100 billion yen ($680 million) worth of yen-denominated bonds this week.
For some investors, it’s a question of when contagion grips, rather than if.
“What you can clearly observe is that liquidity on the credit side has dried up,” Lazard Asset Management global fixed income co-head Michael Weidner said.
“Liquidity and trading activity grinds to a halt first in loan and high-yield markets and then moves over to IG (investment grade) credit.”
NO INVESTMENT GRADE CRISIS, YET
For now, most investors and analysts are predicting greater ructions in the high-yield market, which is populated by companies with heavy debt burdens, patchy earnings profiles and prospects broadly viewed as most at risk from recession.
Aberdeen investment grade credit director Luke Hickmore said he saw few signs of panic among investors in lower-risk debt securities, while credit strategists at UBS have told clients the current situation in credit markets was “nowhere close to the absolute worst case.”
Chris Arcari, head of capital markets at financial services and pension fund consultant Hymans Robertson, was so far sanguine about the moves.
“We’re coming from a position where spreads were very, very tight following a lot of yield driven demand,” he told Reuters.
“I don’t see any huge contagion. I think there’s a rational repricing if that makes sense. It’s not disaster stations.”
Investors pumped record sums into U.S. dollar-denominated investment grade debt funds last year, according to data from LSEG Lipper. For euro-denominated funds, inflows were the biggest since 2019.
A phase of net outflows from those funds – and a selloff in some of the names most sensitive to a trade war – was increasingly likely, analysts said, particularly after the first post-tariff data is published.
Edmond de Rothschild Asset Management head of multi-asset Michael Nizard, who said he started backing out of high-yield debt in late March, added that money managers were also likely to be selling investment grade debt to shore up cash reserves.
“They face outflows from clients and so they need to sell for cash,” he said, predicting a “new round” of credit spreads widening in the short term.
But investment-grade defaults were rare even during the pandemic, which outside the two world wars, represented the greatest “economic full stop in modern times”, Aberdeen’s Hickmore said.
Citi strategists noted on Tuesday that the darkening credit outlook had pushed pricing of three recently issued high-yield bonds beyond 10 percentage points over the risk-free rate.
In a pessimistic scenario where high-yield spreads continue to widen sharply, Sharon Ou, Vice President and Senior Credit Officer at Moody’s Ratings, said the global default rate could exceed 8% in a year’s time from less than 5% today.
“The market dynamics have changed in the sense that this isn’t purely about who’s exposed to tariffs or not, this is a big negative shock for the overall economy, and that affects everyone,” said Viktor Hjort, head of credit research at BNP Paribas.
“But have we seen a panic event? Nothing close to what we saw in 2022.”
‘FED PUT?’
Investors said only a rollback of tariffs by the White House or central bank rate cuts could insulate credit markets from here.
RW Baird strategist Ross Mayfield said he still favoured high-quality companies’ debt, but risks for investment grade were increasing, with even a U-turn by Trump on tariffs potentially adding to market and business uncertainty instead of rebuilding confidence.
And even if the Fed does cut rates to soothe roiled markets, relief for companies could be short-lived.
According to the OECD, at the end of 2024, 63% of investment grade debt and 74% of non-investment grade debt had interest costs below the prevailing market rates and most will likely require refinancing at a higher cost.
“In a stagflationary environment from tariffs, you’ll see both investment grade and high yield corporate borrowers struggle as their costs of debt rise,” Mayfield said.
(Writing by Sinead Cruise; Editing by Amanda Cooper and Hugh Lawson)
