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American firms with low credit ratings are hurrying to issue junk bonds before a forecasted spike in trade tensions in July, which could lead to decreased interest in corporate debt.
In May, companies categorized as high-risk raised $32 billion in the high-yield bond market, marking the highest amount since October, based on JPMorgan’s data. Sales of junk bonds in the first week of June have already exceeded April’s total of $8.6 billion.
Industry professionals anticipate a consistent flow of new debt offerings throughout the remainder of June and into July as long as demand remains robust and market instability is manageable.
However, the upcoming expiration of Donald Trump’s tariff hiatus, known as “liberation day,” early next month may introduce significant uncertainty, reminiscent of the market disruptions seen in early April that halted new leveraged debt deals.
“Markets often fall into cycles where they get complacent. Things feel stable now, but July may bring some turbulence,” remarked David Forgash, a portfolio manager at Pimco.
The additional costs that riskier corporate borrowers pay compared to US government debt, referred to as spreads, spiked from 3.5 percentage points on April 1 to 4.61 percentage points by April 7, according to Ice BofA data.
This jump represented the highest borrowing costs for corporations since May 2023, as investors sought a higher return for the increased risks following Trump’s tariff announcement on April 2.
With some progress in US-China trade talks, spreads decreased to levels similar to late March. Nonetheless, they have yet to return to the lower ranges seen in late 2024 and early 2025 when junk bond spreads dipped below 3 percentage points.
A leveraged finance banker pointed out that the debt markets have seemingly disregarded not only Trump’s escalating tariffs but also ongoing conflicts in Israel and Palestine and the tensions between Russia and Ukraine when making investment decisions.
However, unexpectedly high tariffs or a new conflict involving a major global power “could disrupt the situation,” the banker warned.
“I don’t foresee a repeat of April, where the market practically stalled, but it will likely widen the spreads,” he added.
There is also a robust appetite for high-rated corporate credit. Bank of America strategists predict that investment-grade bond sales could reach between $110 billion and $120 billion in June, making it the highest for that month since 2021.
Kyle Stegemeyer, who leads investment-grade debt capital markets and syndicate at US Bancorp, expressed his expectation that companies will continue to seize opportunities during low volatility periods before anticipated increases related to tariffs and tax negotiations.
“Many issuers are concluding that if there’s an advantageous market window, it’s better to act now instead of waiting until closer to maturity,” he noted.
