Trump's tariffs stirring up the market, cracks appearing in the US credit market but not yet collapsing.

After intense selling in the US government bond market last week, which raised concerns among investors and the White House, investors are closely watching whether there will be further turmoil in the US credit market. Although market sentiment has slightly stabilized, there are still concerns about the ultimate direction of Trump's tariff policy and its potential impact on the economy. Surge in long-term bond yields causing fluctuations Recently, the surge in US long-term bond yields disrupted investor expectations and forced Trump to "put the brakes" on the partial tariff measures announced on April 2. Nevertheless, his trade war rhetoric has triggered rapid retaliation from China, fueling concerns about a slowdown in the US economy and even cooling interest among foreign investors in US assets. However, from the current perspective, the credit market has gradually reopened, especially with bond financing channels for large corporations showing signs of recovery. However, the unease in the market has not completely dissipated. Scott Pike, a senior investment manager at Income Research + Management, said, "We believe it is not yet time to lower credit ratings (i.e. investment risk). The market's reaction has been relatively mild so far." "We will closely monitor when tariffs actually start to have a substantive impact and are reflected in economic data." "No-risk" assets also not spared Last week's selling frenzy mainly focused on the US's $29 trillion government bond market, causing a significant drop in long-term bonds considered as "risk-free assets." Additionally, some "basis trades" were impacted, spreading to a wider range of bond markets, leading to a significant widening of credit spreads. Credit spreads are usually measured in basis points, representing the premium level of bond yields compared to risk-free rates (such as US Treasury bonds). Significant fluctuations in spreads are often seen as real-time indicators of investor sentiment. According to analysts at Deutsche Bank, recently, high-yield "junk bonds" have been hit the hardest, and other sectors relying on bond financing also face spread expansion. The decline in bond prices in cyclical industries like automotive bonds has even exceeded the performance of the overall bond market index. Nevertheless, Mike Sanders, head of fixed income at Madison Investment Advisors, said that stocks and bonds have not fallen to levels reflecting "extreme tariff risk" or an "impending recession" yet. "I think the worst-case tariff scenario has largely passed," Sanders said, "but we still need to face the consequences of these decisions." Stocks and bonds falling, but not collapsing After the escalation of Trump's trade war, the US stock market experienced a technical pullback, with the S&P 500 index falling by about 12% from its peak in February as of Tuesday, but has not entered a bear market territory yet (i.e. a 20% decline). The Nasdaq index has performed even weaker, with a drop exceeding the S&P. In the bond market, high-yield bond spreads soared to 460 basis points on April 7, reaching a two-year high before retreating slightly. The spreads for investment-grade corporate bonds also climbed to 120 basis points at one point. "The market volatility is significant, but I don't think it reflects very negative expectations," Sanders said. He advised that high-grade bonds with yields of around 5% are an ideal choice for risk mitigation, especially in the context of Trump announcing a 90-day global tariff suspension and attempting to conduct trade negotiations. If the economy falls into a "self-inflicted" recession, the Fed may be forced to lower interest rates It is widely expected that if trade policies lead to an economic slowdown or even a "self-inflicted recession," the Federal Reserve may have to restart a cycle of interest rate cuts. This expectation also supports the current stability of bond prices, as higher-yielding bonds become more attractive in a lower interest rate environment. Emily Roland, co-chief investment strategist at Manulife John Hancock Investments, pointed out that current economic data shows a dual structure of "soft data weakness and stable hard data." She said, "Although sentiment data is not good, 'hard data' such as employment still shows a solid economic foundation." Meanwhile, although spreads for corporate bonds issued by major banks like Citi, JPMorgan, and Goldman Sachs have increased, there has been no significant concern about defaults, nor has there been a reflection of serious recession risks. "If high-yield bond spreads rise to 600 to 800 basis points, that would be more consistent with recession panic signals. Credit spreads are often the canaries in the coal mine. If liquidity issues arise or default risks rise rapidly, they are the earliest indicators of warning signs. Right now, we haven't seen that kind of situation," Roland said.