WASHINGTON: Company debt sales have ground to a halt in the United States as markets across the globe show increasing fear of President Donald Trump’s escalating trade war triggering a global recession.
A US$1.1bil leveraged loan sale that was meant to help finance HIG Capital LLC’s purchase of Canadian firm Converge Technology Solutions Corp, was put on pause, according to people with knowledge of the matter.
In the commercial mortgage bond market, Brookfield delayed a US$2.4bil refinancing package for a Hawaiian mall and office complex, citing volatility as the market saw its biggest two-day price decline since March 2020 last Friday.
No new US investment-grade bonds have been issued since last Wednesday morning, before Trump announced his sweeping tariffs.
There are eight issuers that held investor calls and have still yet been able to sell debt.
Transactions on riskier debt are being pulled or postponed, while measures of perceived risk for high-grade and high-yield US corporate bonds are flashing a warning sign.
Across Europe, investors are dumping risky assets, especially those tied to the auto industry. “Credit volatility is back,” Deutsche Bank strategists led by Steve Caprio wrote in a note Monday.
“Crippling policy uncertainty, haphazard tariff rate calculations, a partial loss of confidence in US institutional norms and rising inflation are all notably increasing US risks.”
Should a rout spread and a broad-based freeze in lending to corporations persist it risks further slowing down economic growth, deepening any contraction.
At Saba Capital Management, founder Boaz Weinstein, warned the corporate bond sell-off is only going to get worse and could accelerate bankruptcies.
The trade war has put US stocks fast approaching their first bear market since the Covid-19 pandemic.
Traders are raising expectations for the Federal Reserve to cut interest rates this year – and even raised the possibility of an emergency reduction before the central bank’s next meeting.
Credit markets – which were previously insulated from the volatility – have seen some of the biggest moves since the early days of the outbreak in the last few days as investors digest growing recession odds.
Risk premiums for high-yield debt spiked to the highest since November 2023, while investment-grade spreads stand at the highest since August.
“It’s going to be hard for credit spreads to get back to the tights that they were at previously,” according to Matt Brill, head of North America investment-grade credit at Invesco Ltd. “That’s pretty much off the table, there’s too much uncertainty.”
UBS Group AG strategists expect Trump’s tariffs to push corporate-bond spreads to levels last seen during the early part of the pandemic.
Last Friday, Bank of America Corp took its investment-grade spread forecast for the year wider, though it didn’t expect a worsening to the levels seen during the rate shock of 2022 or the regional banking crisis a year later.
“All this uncertainty creates its own negative momentum,” said Christian Hoffmann, head of fixed income at Thornburg Investment Management.
“If you’re not sure what the policy is going to be, that creates more caution and conservatism, and that caution and conservatism creates more pullbacks over time.”
European credit markets also reacted on Monday, especially the junk market as investors dumped risky assets.
A gauge for European credit risk jumped as much as 47 basis points and is now at its highest level since November 2023, according to Bloomberg pricing.
Bond prices plunged for several members of the index, particularly in the chemicals, auto and real estate sectors, while flooring company Tarkett pulled a deal to amend and extend a term loan.
“We are in the first instance checking how companies will handle tariffs but we’re also now into just thinking about recession proofing,” said Chris Ellis, a high-yield portfolio manager at Axa Investment Managers.
“A sensible strategy for investors could be to sit tight, kick the tires on credits in your portfolio and of course, keep an eye on stuff you’d like to buy when it turns,” he said. Among the biggest losers on Monday were lower-quality credits in industries exposed to US tariffs.
The auto industry was one of the worst hit, with even higher-rated junk names losing ground.
Automakers in the high-yield space have begun changing their business plans to adjust to the tariffs. Jaguar Land Rover said over the weekend it would pause shipments of cars to the United States this month.
The company’s euro-denominated bonds were down over one cent on Monday. Still, credit markets are coming into this sell-off with different foundations when compared to other slowdowns, global strategists at Morgan Stanley said in a note.
Corporate balance sheets are healthy, there is muted leveraged buyout activity and little credit market excess, they wrote.
The last few years have seen significant inflows to credit from yield-based buyers such as US life insurance companies, which have sticky liabilities that are unlikely to see redemptions based on market moves, they added.
At the moment, cyclicals are just getting marked lower in an almost indiscriminate fashion, with the tariff impact really hard to model, said Severin Testroet, a portfolio manager at Helaba Invest.
“Given the volatile US politics in recent months, any partial reverse to the implemented tariffs, or side deals, could be a positive again,” he said. It’s “really difficult to find a stance on the end-game here.” — Bloomberg