Corporate bond buyers should be better compensated for stress caused by escalating trade wars, according to JPMorgan Asset Management.
“We just need to be paid a little bit more for the uncertainty risk now in the market,” said Lisa Coleman, the firm’s head of global investment-grade corporate credit. “The tariffs are very uncertain, so we can’t really have a zero probability of recession.”
Even before the trade war started, JPMorgan was anticipating pressure on US industrial companies’ revenue amid growing uncertainty about the US policy outlook and declining consumer confidence. It expects earnings before interest, taxes, depreciation and amortization to grow by 3% this year, down from a 5% pace in 2024.
“That as a starting point gives us a little bit less of a cushion in the event that we start to get bad news on tariffs,” Coleman said on Bloomberg Intelligence’s Credit Edge podcast.
High-grade bond spreads are just 2 basis points wider this month, after spiking in mid-March to a six-month high as US tariffs proliferated and recession fears ripped through markets. Rising demand for limited new issuance has kept credit risk premia below long-term averages for months but spreads tend to flare in economic downturns.
“The technicals from where we were at the beginning of the year have deteriorated,” said Coleman. JPMorgan’s global investment grade credit team managed $73 billion in assets as of December.
Click here to listen to the conversation with JPMorgan’s Coleman
JPMorgan also expects foreign flows into U.S. credit markets to soften, particularly from Japan, where rising local yields make government bonds more attractive to domestic investors.
“The competition from JGBs is pretty keen and we haven’t seen that in years,” said Coleman, referring to Japanese government bonds.
If markets priced in a 20% probability of recession — from a very low likelihood reflected in the premium now — the high-grade US credit spread would go to 120 basis points, from 90 basis points at the March 26 close, according to Coleman. However, she expects the market to stay in a range of 80 to 110 basis points, anchored by strong demand for credit assets and the ability of companies to manage through the policy storm.
Coleman also notes that since the Federal Reserve backstopped corporate debt in April 2020, credit markets are less susceptible to wild swings in risk premia, or waves of rating downgrades.
“We seem to have some official support that prevents that from happening,” said Coleman.
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