Trade uncertainty freezes credit markets pushing volatility near record lows

Credit investors are avoiding big bets as worries over U.S. trade policy keep markets stalled, driving credit volatility to near-record lows. A gauge that tracks price swings in North American credit-default swaps plunged by almost 75% last week, bringing it close to its weakest reading ever.

At the same time, a similar index for European investment-grade companies fell to its lowest since mid-2021. Moreover, moves in corporate bond spreads have all but disappeared.

Bloomberg reported that Money managers are playing it safe and won’t take on more risk or bet on another drop until U.S. tariff plans become clearer. After surging in April, risk premiums eased when the White House cooled down on possible trade barriers.

“Spreads can remain rangebound until there is a resolution,” said Jamie Newton, head of global fixed-income research at Allspring Global Investments.

Instead, he’s focused on what he calls “coupon-plus” returns, or the yield earned simply by holding bonds.

Volatility has fallen so far that both corporate bonds and the contracts that insure them barely budged, even when news that usually shakes up markets came out. Last week, President Donald Trump posted on social media about the challenges of striking a deal with China’s Xi Jinping, only for the two leaders to speak by phone days later.

On the other hand, U.S. services activity and private-sector payroll numbers came in weaker than expected, raising fears that slower growth could undermine companies’ ability to service debt.

Global corporate bond spreads are now back to where they were before Donald Trump’s early-April “Liberation Day” announcements.

G7 summit and July 9 tariff deadline may spark market volatility

So far, people remain confident in credit markets even though conditions are tighter.

“There’s no fundamental reason for a big credit sell-off,” said Alexandra Ralph, senior fund manager at Nedgroup Investments. She does expect spreads to drift wider through the end of the year but without a dramatic reversal since there aren’t any obvious troubles to trigger a sharp move.

Still, traders at major banks are preparing for the next swing in fixed-income markets, and some investors are bracing for volatility to pick up again.

“Following a period when complacency appears to have risen, the firm would not be surprised if volatility doesn’t pick up materially again over the course of the coming month,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

He pointed to the Group of Seven meetings in Canada this month and the Trump administration’s July 9 deadline for new tariffs as potential catalysts for a spike in volatility.

Christian Hantel, head of global corporate bonds at Vontobel Asset Management, added that any major macro headline that hits both firms and investor appetite could be especially worrisome. “This is still the most worrisome part for me,” he said.

If you're reading this, you’re already ahead. Stay there with our newsletter.