By Christine Idzelis
Tariffs are ‘material but manageable from a U.S. economy perspective,’ says Vanguard’s head of high-yield credit
The U.S. junk bond market is sending an optimistic message about the economy, despite market volatility around tariffs.
“This risk-wary market is just as bullish on the American economy as stocks,” DataTrek Research co-founder Nicholas Colas said in a note emailed Tuesday. High-yield corporate bonds, often referred to as junk bonds, are particularly vulnerable to default during economic downturns.
Investors are paid a premium over comparable Treasurys for taking such risks in corporate bonds. While those spreads are now historically tight, raising valuation concerns, they also suggest junk-bond investors aren’t expecting a recession, despite President Donald Trump’s tariffs.
U.S. high-yield corporate-bond spreads are lower than at any point in 2021, “when confidence in the U.S. economy was very high due to Pandemic Era fiscal and monetary policy,” Colas wrote.
Junk-bond spreads have fallen to around 2.88 percentage points over Treasurys, with the only recent period in which they were lower being January, the chart above from DataTrek’s note shows.
The high-yield corporate-bond market “reflects the same sort of optimism that U.S. large caps are currently showing,” said Colas. “Given that bond investors are a more cautious lot than their equity market counterparts, that is a bullish signal for stocks.”
The S&P 500 index SPX, a widely followed gauge of U.S. large-cap stocks, ended July 3 at a fresh record high for the seventh time in 2025, according to Dow Jones Market Data. The index closed Tuesday 0.9% below that all-time peak.
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Tariffs are “material but manageable from a U.S. economy perspective,” said Michael Chang, head of high-yield credit and senior portfolio manager at Vanguard. “Our view is that where tariffs are ending up won’t be the trigger for a recession here in the U.S.”
High-yield bond spreads would likely increase on fears of a scenario that risks triggering a recession, hurting junk-bond returns, according to Chang. But so far, 2025 has been a good year for junk bonds.
The iShares iBoxx $ High Yield Corporate Bond ETF HYG, an exchange-traded fund that tracks an index of high-yield debt, saw a total return of 5% in the first half of 2025, according to FactSet data. The SPDR Bloomberg High Yield Bond ETF JNK gained a total 4.8% over the same period.
June was “a great month” for high-yield bonds, said Chang.
The SPDR Bloomberg High Yield Bond ETF, which trades under the ticker ‘JNK,’ returned a total 2% in June, the fund’s best monthly performance based on total returns since July 2024, FactSet data show.
After a strong first half, the ETF has fallen thus far in July as investors monitor the latest tariff developments. For example, Trump on Monday posted via social media letters that the White House sent to several countries about the size of the tariffs they face on imported goods starting Aug. 1.
Because of tariff-related concerns, Chang said he favors defensive areas of the high-yield market that are more domestically focused, like healthcare, food and beverages, and utilities.
Valuations are ‘pretty stretched’
High-yield debt spreads are generally “tight,” with valuations looking “pretty stretched across the board” in corporate credit, according to Chang. Yet in his view, junk-bond spreads may remain low for a while, as the U.S. may avoid an economic downturn.
“The skies are cloudy, but they’re not stormy,” he said. “The economy is probably going to slow from tariffs, but not to the point of recession. That’s fine for high yield.”
The U.S. junk-bond market currently provides an annual yield of around 7%, although that may ebb and flow with movement in spreads, according to Chang.
The high-yield bond market in the U.S. today is generally composed of higher-quality credits compared with the period seen before the global financial crisis of 2008, he said. Chang noted that he’s watching for signs of stress in other areas of risky credit, such as leveraged loans.
With the potential impact from tariffs not yet fully felt, he said he’s cautious about the retail sector due to its exposure to levies. “It would not surprise me to get more day-to-day volatility” as the market absorbs more tariff developments over the next several days, he said.
The U.S. high-yield bond market retreated modestly Tuesday, while major equities benchmarks mostly fell. The Dow Jones Industrial Average DJIA closed 0.4% lower, while the S&P 500 slipped 0.1% and the Nasdaq Composite COMP eked out a gain of less than 0.1% to finish nearly flat.
-Christine Idzelis
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07-08-25 1704ET
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