Watch out the 600bp level for US HY spreads

What a terrible week for credit markets ! On top of the highly punitive “reciprocal” tariffs announced by D. Trump last week, The Fed’s speech later last week highlighted clearly that it is much too soon to play the central bank’s bid in a falling market. Moreover, retaliation measures are likely to come, as announced by China over the week-end (34% additional tariff on all US imports starting April 10, export restriction on rare earths…) and the firm position of US president on tariffs so far does not indicate any ST U-Turn on that policy. We mentioned last week that AT1s and HY were most at risk in that escalating tariff environment: after an impressiv 100bp, 64 and 62bp widening respectively for US HY, €AT1s and €HY, are we pricing enough recession risk there ? With 160bp widening since the beginning of the year, US HY spreads are pricing in close to 40% of a recession risk according to our model (which still appears too low in such an environment). Watch out at least the OAS+ 600bp level before the Fed could consider the tariff shock as a severe risk for the US economy. At the close of 4 April (at asw+368bp, +75bp YtD ), €HY are pricing no more than 25% of a recession risk , while €IG are better protected after a 20bp widening last week. Sector-wise, last week was a indirect reaction to D. Trump’s reciprocal tariffs: Energy underperformed with 25bp widening due to the consequences on oil prices (see Oil Market Update – Fundamentals vs OPEC vs Trump ), Technology and Telecoms followed (+20bp) as US companies represent a large share of those iBoxx € credit indices.