Corporate Credit Snapshot - May 2025

May 8, 2025

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US

US credit markets saw elevated volatility across asset classes, primarily driven by US tariffs first announced on April 2nd, but adjusted throughout the month. Following the initial announcement, US high yield spreads widened considerably. US Treasury yields rose as liquidity drained from Treasury markets and fear of a buyers’ strike spread. Although the administration announced a 90-day pause on most tariffs to give the US time to negotiate trade agreements, the 145% tariffs on China remained in place. However, once President Trump’s “walk back” began, markets jumped. From April 9th to April 30th, the S&P 500 rose by 12%, high yield spreads tightened significantly, and Treasury yields declined. During the second half of April, the administration continued to claim that negotiations with China are underway, while the Chinese government denied that trade talks are happening.

EUROPE

European credit markets generated positive returns in April. The month saw elevated volatility across asset classes, primarily driven by US tariffs first announced on April 2nd, but adjusted throughout the month. Spreads were wider across credit markets, with significant moves seen early in the month. Spreads then broadly recovered approximately half of their move by the month’s end. In both the US and Europe, decompression caused spreads to widen between credits of different sectors. More defensive sectors—such as utilities—outperformed, while more cyclical and tariff-sensitive sectors underperformed (e.g., energy, chemicals and automotives & auto parts). While US rates initially rallied, concerns around government policy prompted a reverse move. The US 10-year Treasury yield was approximately unchanged on the month, while conversely the German Bund curve rallied through the month (yields fell). We also saw divergence in central bank messaging. The European Central Bank cut rates by 25 basis points (bps), while the Federal Reserve (which did not meet in March), cautioned against rate cuts given current uncertainty, particularly regarding inflation.

EM

Emerging Market (EM) debt delivered mixed results in April. The month saw elevated volatility, primarily driven by US tariffs first announced on April 2nd, but adjusted throughout the month. EM sovereign debt outperformed corporate credit at the broad index level, driven by idiosyncratic events in the CCC rated segment (e.g., Ecuadorian bonds surged on election results, and Argentinian assets gained on news that the government would ease strict currency controls as part of a US$20 billion IMF loan agreement). In contrast, the B/CCC rated corporate energy sector was negatively impacted by declining oil prices. April’s elevated volatility led to a broad-based widening across credit rating buckets. Within corporate credit, this environment favored investment grade over high yield, while short-duration bonds outperformed their longer-duration counterparts. Regionally, EMEA (Europe, Middle East, and Africa) led performance, supported by declining European government yields, whereas Latin America underperformed, reflecting weakness in energy prices. Financials and real estate emerged as the top-performing sectors as they were not directly impacted by the US “Liberation Day” announcements, but did benefit from favorable yield and curve dynamics.

OUTLOOK

US tariff announcements ignited volatility at the start of April, which calmed somewhat despite lingering uncertainty. Consequently, our outlook hinges heavily on impacts from US-China tensions and a broader trade war. We anticipate Chinese and US GDP to be most affected. US consumers may pay more for goods, supply chains could be disrupted, and inflation may rise. These factors could restrict the Federal Reserve’s ability to cut interest rates—unless the job market weakens—given the Federal Reserve’s dual mandate. Meanwhile, we note that OPEC has changed its stance on oil prices for the time being, and this could provide some respite for inflation-weary consumers in the US. Furthermore, 1Q GDP in the US showed a jump in imports to front-run tariffs and consumer spending on goods and services remained solid.

 

Past performance is not a reliable indicator of current or future performance. 

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This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of May 2025 and may change without notice.

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