President Donald Trump during a tariff announcement in the Rose Garden of the White House on April 2. Photographer: Kent Nishimura/Bloomberg.
UBS Group AG strategists expect the impact of U.S. President Donald Trump’s tariffs to push corporate-bond spreads to levels last seen during the early part of the pandemic.
Concerns that tariffs will significantly slow down the global economy shook credit markets last week, with gauges that track credit-default swaps surging by the most since March 2023 in both the United States and Europe. Average high-grade spreads ended last week at 1.09 percentage points, or 109 basis points (bps), the highest level since August 2024, according to Bloomberg index data. Junk spreads ended Friday at 427 bps, the highest level since November 2023.
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UBS now sees the possibility of corporate-bond spreads—or the added premium over U.S. Treasuries that investors get paid to hold riskier debt—reaching between 160 bps and 170 bps for high-grade debt, and 600 bps to 650 bps for junk debt, by mid-2025, strategists including Matthew Mish wrote in a note today.
Bloomberg indexes that track corporate bond spreads haven’t reached those levels since the Covid-19 pandemic in 2020. The Federal Reserve typically starts to worry when the investment-grade spread reaches 150 bps.
“Credit spreads can be volatile in the months heading into the start of a recession,” the strategists noted. The UBS strategists effectively foresee a mild recession, although a more severe than what they modeled in November. If the United States can avoid a recession, high-grade and junk spreads could stabilize in the second quarter to a range of 100 bps to 110 bps and 375 bps to 425 bps, respectively.
“Our new baseline assumes most of the tariffs announced remain in place for about nine months,” the strategists wrote. “The upside-risk case would be if tariff retaliation is more measured and negotiations result in an easing of tariffs over the next several months.”
Sectors that underperform in recessionary environments based on UBS’s prior analysis include CCC rated bonds, debt from communications, consumer cyclicals, transports, and basic materials sectors.
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