Trade War Rattles Credit Markets, Hits High-Yield Bond ETFs

U.S. Treasurys sold off this week as concerns mounted over President Donald Trump’s escalating trade war and what it could mean for demand from foreign investors. The drop in the world’s safest bonds has rippled across fixed-income markets, weighing on other segments, especially high-yield "junk" bonds.

Junk bonds have taken a hit, not just from the rise in Treasury yields, but also from widening credit spreads, as investors grow increasingly worried that the trade war could slow economic growth and lead to more defaults among riskier issuers.

HYG Shows Sharp Reversal

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG), one of the largest ETFs tracking junk bonds, is now down around 1% year to date. That’s a sharp reversal from less than three weeks ago, when the fund was up close to 2%. 

According to one measure, junk bond spreads have surged to their highest level since November 2023. The Barclays Capital U.S. Corporate High Yield Index is now yielding 4.2 percentage points more than 10-year Treasury notes, well above the 2.6% spread seen in January and the 3.1% spread from just a few weeks ago.

Spreads Signal A Worrying Trajectory 

The widening reflects mounting concern about the health of the U.S. economy and the potential fallout from President Trump’s trade policies. While fears haven’t reached panic levels yet, the trajectory is worrying.

For context, during past periods of economic stress, junk bond spreads climbed significantly higher. In 2022, they topped 6%. During the early days of the pandemic in 2020, they peaked above 10%. And back in 2016, amid a collapse in oil prices that slammed junk-bond-issuing energy companies, spreads surged past 8%.

Today’s levels aren’t that extreme, but the momentum is moving in the wrong direction. And investors are watching closely.