Global Credit Rally Hides Recession Risks Investors Concerned About U.S. Policy Uncertainty
Investors are growing increasingly worried that the year-long rally in global credit rall markets may be masking underlying risks. U.S. policy uncertainty, particularly amid escalating trade tensions, could be pushing the world’s largest economy toward a potential recession.
Raising Alarm The Gray Swan Risk
Some market analysts are raising alarms, describing the situation as a “gray swan” event. Unlike the unpredictable nature of black swans, gray swans are largely visible but often overlooked until they materialize. Investors are cautioned that a sudden economic shift could be closer than expected.
Credit Markets Are Unusually Calm Amid Growing Risks
Despite the increasing concern, credit markets remain surprisingly calm. Banks recently completed a massive €7.45 billion debt deal, which appears complacent given the looming uncertainty around U.S. trade policies. President Donald Trump’s plans to impose new tariffs on trading partners this week only add to the risks.
Discrepancy Between Stock Markets and Credit Markets
The S&P 500 has been pricing in a 33% chance of a U.S. recession, a significant increase from the 17% at the end of November. Meanwhile, credit markets are pricing in only a 9-12% chance of recession, indicating a major discrepancy between stock market sentiment and the bond market’s expectations.
Potential Impact of Trump’s Tariffs on the Credit Market
Trump’s planned “Liberation Day” tariffs on April 2 could have severe consequences for credit markets, as seen in the recent auto industry trade restrictions. The 25% tariffs forced one supplier to adjust pricing to avoid canceling a debt deal, and bond prices across the U.S. and Europe fell. The potential fallout from these tariffs is raising concerns in the credit market, including a $2.25 billion debt package for a Canadian auto parts manufacturer.
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Technical Factors Masking Credit Risks
Despite mounting risks, technical factors have been concealing the true impact on credit markets. Reduced debt supply and attractive yields in a high-rate environment have drawn investors. However, some caution is urged, as passive investors may be buying bonds without fully assessing the underlying risks.
Declining High-Yield Bonds Amid Market Turmoil
High-yield bonds, particularly in Europe and the U.S., have recently experienced declines, marking the worst returns since late 2022 and 2023. Although spreads remain historically strong, they are still under pressure, with a growing number of investors expressing concern over potential market turbulence.
Growing Anxiety Amid Economic Indicators
Other market indicators suggest rising anxiety, with U.S. cash holdings reaching $7 trillion and gold hitting a new all-time high. Additionally, credit default swaps for junk-rated bonds, which hedge against credit risk, have reached their highest levels since August, signaling increasing market fears.
Potential Gray Swan Risks for 2025
Looking ahead, analysts are identifying possible gray swan risks for 2025, including a crash in Nvidia’s shares, rising U.S. Treasury yields, and a U.S. growth shock. Investors are advised to remain cautious as these risks become more visible in the coming months.
Sector-Specific Risks and Credit Downgrades
Candriam’s Nicolas Jullien predicts sectors like autos, sensitive to tariffs, could face further credit downgrades. High-yield market risks remain. Potential for widening spreads emphasizes the need for investor vigilance. Global economic uncertainty demands careful attention to market shifts.
