Junk bonds are showing signs of calmer times, with positive developments in U.S. trade negotiations prompting Barclays to revise its forecast for a closely watched measure of the corporate debt market.
Barclays analysts said in a note Wednesday that they revised their 2025 forecast for U.S. corporate credit spreads, "turning less bearish" as they trimmed how much they expect those measures of risk to widen for both high-yield and investment-grade bonds by year-end.
"We view last weekend's trade war de-escalation as a major and lasting shift in the economic backdrop," the analysts wrote, referring to the outcome of talks between the U.S. and China that led to a lowering of unsustainably high tariffs imposed by both countries.
Spreads in the U.S. high-yield corporate bond market - or the extra compensation that investors demand for owning such riskier debt securities compared to safer Treasurys - fell to 309 basis points on Tuesday from 461 basis points on April 7, according to ICE BofA US High Yield Index Option-Adjusted Spread data on the website of the Federal Reserve Bank of St. Louis.
That indicates "a clear appreciation by the market that some of the worst fears were maybe overly priced into the market," said Mitchell Garfin, co-head of leveraged finance at BlackRock, in a phone interview. "The probability of a recession has meaningfully declined" after the White House paused and rolled back certain tariffs to allow time for countries to negotiate lower levies than the ones President Donald Trump announced in early April, he said.
Trump announced his "liberation day" tariffs on April 2, stunning markets with the steep trade levies.
"We're going to see inflationary pressure over the next few months" due to tariffs, Garfin said - but after progress in the White House's trade negotiations, it may not be "as severe as what the market feared with those robust tariff levels that were announced on 'liberation day.'"
High-yield bonds - commonly referred to as "junk" for their below-investment-grade ratings - have rallied over the past month, increasing their total returns so far in 2025.
For example, the iShares iBoxx $ High Yield Corporate Bond ETF HYG, an exchange-traded fund that tracks an index of U.S. high-yield bonds, has posted a total gain this year of 2.6% through Wednesday, according to FactSet data.
That beats the U.S. stock market's performance year to date, with the S&P 500 SPX finishing Wednesday up a modest 0.2% for 2025.
The all-in yield for U.S. junk bonds remains attractive, even if spreads aren't "compelling" after tightening, said Benoit Anne, head of markets insights at MFS Investment Management, in a phone interview.
Their effective yield was 7.23% on Tuesday, according to ICE BofA US High Yield Index Effective Yield data found on the St. Louis Fed's website.
Barclays analysts now expect high-yield spreads will "marginally" widen by year-end, to 325 to 350 basis points. That's tighter than their forecast in mid-March, when they anticipated an increase to 400 to 425 basis points within six months, their note showed.
"There is a lot of uncertainty still" surrounding tariffs, which means that spreads risk widening and high-yield bond prices could fall, according to Anne. Still, the all-in yield on junk bonds currently provides a "nice" cushion before returns would be wiped out, he said.
-Christine Idzelis
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