Why investors are dumping US junk corporate bonds

by Rachel Graf, Josyana Joshua, Aaron Weinman and Finbarr Flynn

US junk corporate bonds led the biggest slump in global high—yield debt since 2020 as the steepest American tariffs in a century triggered fears about worldwide growth.

The extra yield investors demand to own the risky debt instead of Treasuries widened 45 basis points Thursday to 386 basis points, marking the worst selloff since March 2020 at the onset of the coronavirus pandemic, the Bloomberg Global High Yield Corporate index shows. 

Yield premiums for lower-rated US notes spiked 53 basis points, also the most since March 2020, to 387 basis points, a separate Bloomberg index shows. That move was significantly bigger than for Asian or European peers. 

Many investors dumped US junk bonds and leveraged loans by pulling cash from exchange-traded funds. Some traders also looked to hedge risk in the US high-yield bond market with put options on ETFs, which would rise in value if markets deteriorate. 

Other markets reflected similar fear, with stocks plunging, the US dollar weakening and prices dropping for many leveraged loans tied to companies in the US and Europe.

While credit was largely spared the broader volatility seen in stock markets in recent weeks, debt investors have grown wary of how tariffs will directly affect borrowers. This could drive spreads higher, according to Kelly Burton, a managing director who covers US high-yield investments at Barings.

“We appear to be pricing in some level of catch-up because credit has outperformed equities,” Burton said. “Decompression will continue in this environment, with more leveraged, CCC rated companies being most impacted.”

Global high-yield spreads are widening from historical lows and had touched their lowest since 2007 only in February, the Bloomberg index shows. Their yield premiums have soared to the highest since August, well above their investment-grade peers. That gap is now the widest since 2023, the data show.

Moves for Asian and European junk bonds were smaller Thursday than for US peers. Spreads on Asian speculative-grade dollar debt widened 32 basis points, the biggest increase since August, and 23 basis points for pan-European peers, the largest-daily rise since February of last year, Bloomberg indexes show.      

The risk-off spike is also affecting better-rated debt. For global investment-grade bonds, risk premiums rose by seven basis points to 104 basis points over benchmark rates, the highest since September, according to data compiled by Bloomberg.

New American corporate debt issuance is also largely on pause. At least six borrowers that planned to sell such bonds on Thursday stayed on the sidelines, while offerings in the high-yield bond and leveraged loan market have also dried up. Some deals launched before the deepening rout are struggling.

Goldman Sachs Group Inc. credit strategists led by Lotfi Karoui wrote in a note Thursday that they expect credit spreads to continue to widen. The firm forecasts US junk bond spreads will widen to 440 basis points by the third quarter, compared with 380 basis points for euro-denominated peers.

US high-yield “sectors with a higher share of foreign sales have also seen their spreads widen the most, suggesting investors are anticipating some fundamental damage from retaliatory tariffs,” they wrote. 

Copyright Bloomberg News