Trump Tariffs: The Junk Bond Market May Be Sitting On A Time Bomb

Zinger Key PointsJunk bond spreads fall to 286 bps, erasing tariff-driven risks.Analysts warn rising credit risk may soon reverse current bond optimismUp Next: Get 5 Dark Horse Stocks Wall Street Is Quietly Loading Up OnWhile PresidentDonald Trumpramps up his global tariff campaign, sending warning letters to 14 countries, the U.S. junk bond market is behaving as ifnone of it matters.High-yield credit spreads—a closely watched barometer of risk in lower-quality corporate debt—have dropped to 286 basis points over comparable Treasuries, near year-to-date lows.That's a sharp retreat from early April, when spreads blew out to over 460 basis points in response to Trump's initial tariff salvo.Despite new threats targeting key trading partners, credit investors appear convinced that the U.S. economy will weather the trade storm.Yet, the composure of high-yield spreads may be dangerously misleading. When credit markets fail to price in macro risks, they create stress no one sees until it’s too late—and that’s the time bomb. Should trade tensions lead to macroeconomic turbulence, junk debt could reprice abruptly and violently, sending shockwaves across the whole financial system and fueling the threat of a broader crisis.“On the surface, the credit markets appear calm. Credit spreads are low, the demand for these bonds is healthy and default rates overall remain relatively low. Under the hood, however, some stress signals are starting to show,” said analystMichael Gayed, CFAin an email comment.“The extra yield investors demand above and beyond the risk-free rate, go back to pre-Liberation Day levels,” he added.Chart: Junk Bond Spread Has Completely Wiped Out Tariff-Related RisksA Calm Credit Market May Be Overlooking An Economic FalloutOn prediction platform Kalshi, the probability of a U.S. recession this year sits at just 19%, barely above the 17% low reached in January. On May 1, it had surged to as high as 61%.The drop in junk bond spreads suggests markets are pricing in minimal risk of recession, earnings deterioration or funding stress in the corporate sector.Since April lows, theiShares iBoxx $ High Yield Corporate Bond ETFHYGhas rallied almost 5%, while a broader measure of risk-freeEarlier this week, the White House sent formal tariff warning letters to 14 countries—mostly in Asia—including Japan and South Korea. Absent bilateral trade deals, those nations face new "reciprocal" tariffs between 25% and 40%, starting Aug. 1.Trump also warned the European Union that a similar letter would be sent within days, threatening tariffs as high as 200% on pharmaceuticals and 50% on copper imports.In a note Wednesday, Goldman Sachs economistElsie Pengsaid the Trump administration has already implemented a "range of tariff increases at both the country and sector levels," with further actions expected. Goldman estimates the effective U.S. tariff rate has already risen by 9 percentage points—and may reach 14 points if additional sectoral tariffs are enacted.These types of shocks, Peng noted, tend to "meaningfully pass through to consumer prices," citing the 2018–2019 trade war experience.High-Yield Spread: Why It Matters NowThe compression of high-yield spreads to 286 basis points signals calm, but risks may be building beneath the surface."Those juicy 7–8% yields might look tempting, but there's credit risk in there that most investors haven't had to really consider in a while," saidMichael Gayed, CFA. "If credit spreads start widening and defaults tick up, the price direction on junk bonds can quickly turn south."After a decade of cheap money, debt is now more expensive and credit quality matters.With trade tensions rising, volatility could return fast.Loading...Loading...Read now:Wall Street Is On Fire—So Why Is This Wall Of Cash Moving Abroad?Image: ShutterstockHYGiShares iBoxx $ High Yield Corporate Bond ETF$80.140.18%Stock Score Locked: Edge Members OnlyBenzinga Rankings give you vital metrics on any stock – anytime.Unlock RankingsEdge RankingsMomentum43.97Price TrendShortMediumLongOverviewJOJOATAC Credit Rotation ETF$15.040.17%Market News and Data brought to you by Benzinga APIs© 2025 Benzinga.com. . .Posted In:Analyst ColorGovernmentRegulationsBondsSpecialty ETFsTreasuriesTop StoriesAnalyst RatingsETFsBond marketDonald TrumpExpert Ideashigh-yield bond marketjunk bondsStories That Matter