Credit Spreads: Pain Arrives, Risk Repricing

Trump does his second multiplier retaliation to the retaliation in a week, and the market stops talking about negotiating tactics.

“Doubling and quadrupling tariffs is in my nature,” said the scorpion to the frog.

• We update another ugly move in credit spreads as the rolling period for HY is turning into a real sell-off stretch with quality spreads gapping wider. HY is now +74 bps over 1-month and follows a similar wave we just wrote up earlier this week (see Credit Spreads Join the Party 3-10-25).

• We look back to Dec 2018 for a similar period of utter weirdness (and tariff noise) in Trump 1.0 when HY OAS moved +104 bps wider that month in what was a grossly overdone move but without the scale of cause-and-effect that we can see today as tariff emotions go off the rails.

• Today’s spread backdrop is still much tighter than that Dec 2018 period with today’s HY close at +340 bps vs. the end of Dec 2018 at +533 bps. Back then, IG was +159 bps vs. today’s +97 bps. The HY spread backdrop today is still well inside long-term medians closer to +462 bps (see Footnotes & Flashbacks: Credit Markets 3-10-25).

• If 2013 brought us the taper tantrum, 2025 brings the tariff tantrum as the Trump impulse control problem rears up again and roils the markets. The pattern of doubling and even quadrupling the retaliation counters raised the stakes for the trade partners as Trump will face the price and cost impacts that will flow into economic metrics even as the stock market and credit risk price some of the potential effects in now (see Trade: Betty Ford Tariff Wing Open for Business 3-12-25).

HY had another rough day and we saw quality spreads gap again with the 1-month run for HY now +74 bps wider over 1-month and IG +14 bps. The trouble is rising from the bottom up with IG still in double digits or still in the general area of past lows of earlier cycles as we detail in our weekly Footnotes publication. Past IG lows included June 2014 at +106 with the Sept 2021 lows of around +86 bps. IG is thus showing some resilience.

For HY, the +340 is a long way from the +260 bps low in Nov 2014. We see +41 bps of that widening in the last week. While some of it has likely been fanned by a rapid S&P 500 correction, the tariff force runs strong with this one. The market is seeing Trump really believes what he is saying (some of us are not surprised by that), and we have a lot more to come.

There is a lot of action and noise ahead on tariffs, and Trump’s mouthpieces need better scripts or better spin. They have been relatively lame and transparent in their axes to this point on facts and concepts while basic reality is knocking on the door. That is, the “buyer pays” and not Trump’s pitch that the seller pays. The tariff transaction will start ringing up the costs and the facts will see more daylight. Then again, maybe Trump won’t sting the frog and retreat. We don’t see that happening. He rather take his chances.

See also:

Trade: Betty Ford Tariff Wing Open for Business 3-12-25

CPI Feb 2025: Relief Pitcher 3-12-25

Credit Spreads Join the Party 3-10-25

Footnotes & Flashbacks: Credit Markets 3-10-25

Footnotes & Flashbacks: State of Yields 3-9-25

Footnotes & Flashbacks: Asset Returns 3-9-25

Auto Suppliers: Trade Groups have a View, Does Washington Even Ask? 3-11-25

Tariffs: Enemies List 3-6-25

Happy War on Allies Day 3-4-25