(Bloomberg) — Not even the strong rhetoric on tariffs from U.S. President Donald Trump could shake up the credit markets, hinting to many money managers and strategists that the market might be getting a bit too comfortable.
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Monday saw hardly any changes in credit default swap prices, despite the looming possibility of tariffs on goods from Mexico and Canada. Interestingly, the volume of trading in these derivatives shot up to more than double the daily average from the prior week, before leveling off to normal activity by Tuesday.
“The reason CDS didn’t take a hit is that credit remains a pretty tight asset class with valuations extremely stretched across the board,” explained Gabriele Foa from Algebris Investments, whose Global Opportunities Fund is treading carefully nowadays. Foa pointed out that high-yield CDS has hit these levels only a handful of times in the past decade, typically followed by a significant widening over the subsequent six to nine months.
Trump’s focus is on rejuvenating U.S. industry, trimming down the government deficit, and strengthening negotiation leverage with other countries through tariffs. This rapid-fire approach has caught markets off guard. Strategists at JPMorgan Chase & Co., including Matthew Bailey, grew bearish in recent weeks, spotting increasing signs of complacency within the market, as current pricing seems unjustifiably high and disconnected from the often alarming headlines.
Bank analysts in Europe have even created a ‘Trade War’ basket filled with CDS linked to European firms that face potential tariff exposure. They argue that despite some easing of threats against Mexican and Canadian goods, considerable risks persist, which, paired with compact valuations, make hedging strategies quite appealing.
Gabriele Foa perceives a similar complacent attitude among debt investors when it comes to emerging risks, suggesting the markets might be downplaying potential threats to economic growth. He indicates that credit seems “priced for perfection,” though risks of volatility still exist, putting credit in a precarious position.
This all contrasts sharply with the foreign-exchange options market, where trading volumes have surged to highs not seen in years as investors seek downside protections.
Recently, CDS have benefitted from the fact that DeepSeek’s emergence is not perceived primarily as a debt concern, a derivatives trader noted. The influence of tariffs is expected to have a minimal impact on credit because unlike the equity markets, credit hasn’t experienced significant gains, which means any hiccups may have muted effects overall.
Chris Wright from Crescent Capital Group commented on the Bloomberg Intelligence Credit Edge podcast that while Trump’s policies aimed at supporting business growth could have substantial consequences for credit, the uncertainty surrounding the future persists. Given bouts of market turbulence, many debt investors are focusing on interest income this year rather than banking on more tightening of spreads above government bonds, which could lead to more notable price shifts down the road.
Foa pointed out the current negative asymmetry in credit: “You might earn a carry of 3% to 4%, but a market accident could easily lead to 10% to 12% losses.”
This market calmness stands in contrast to the high activity seen in foreign-exchange options, where investors are vigorously seeking to hedge against potential losses.
In the U.S. and Europe, investment-grade bond markets hit the brakes on Monday due to Trump’s tariff plans, which dented credit sentiment. Deal-making resumed by mid-week, presenting credit investors with a dilemma: They can either divest from companies at risk to avoid further losses or place bets on their resilience in weathering the economic storms.
A consortium of banks led by Morgan Stanley sold $5.5 billion in debt linked to Elon Musk’s social media enterprise X, thanks to higher-than-anticipated investor demand. Meanwhile, Apollo Global Management Inc. is working on a platform to simplify trading in high-grade private assets for investors.
Private equity firms are increasingly introducing tighter controls on financially troubled portfolio companies, adding clauses to limit creditor voting rights and pushing back against lenders’ cooperation agreements. After challenges in selling debt for Lakeview Farms’ acquisition of Noosa Yoghurt, a Citigroup-led group has shifted focus to private credit firms to stimulate interest.
Rogers Communications Inc. is exploring the sale of junk bonds in both Canadian and U.S. dollars, possibly totaling around C$4 billion ($2.8 billion). Additionally, insurance companies are increasingly buying asset-backed bonds to meet the soaring needs of their annuity products, a trend likely to persist, according to Morgan Stanley.
Leveraged loan investors are welcoming borrowers back into traditional loan markets, though they remain cautious about every aspect of private credit refinancing. Following losses from missteps in low-yielding foreign bonds, Norinchukin Bank has redirected its focus to riskier leveraged loans and sought extra capital.
Returning outside investors’ capital, New York-based hedge fund Fir Tree Partners—known for its activist campaigns—plans a strategic reset. Similarly, Oaktree Capital Management LP is in discussions to replace Nomura Holdings Inc. as the lead lender to B. Riley Financial Inc.
Several firms, including Liberated Brands and the Essex Technology Group, have declared bankruptcy, with Nikola Corp. considering similar steps.
On the Move
Ares Management Corp. has promoted Kipp deVeer and Blair Jacobson to the joint roles of co-presidents, highlighting credit’s importance in the company’s strategy. Kort Schnabel will step into deVeer’s shoes as CEO of Ares Capital Corp. Meanwhile, Macquarie Group Ltd. plans to shutter its U.S. debt capital markets division to prioritize private credit, affecting around 80 staff members.
Barclays Plc recently expanded its team handling significant risk transfers. New hires, such as Krutheeka Rajkumar and Sarah Rainey, bring expertise to the firm’s New York and London offices, respectively.
Citadel has brought on Morad Masjedi as a portfolio manager focusing on mortgage-backed securities, as part of its push into fixed income. D2 Asset Management tapped former Freddie Mac CEO David Brickman to lead investments in residential real estate.
Swedbank has announced Erik Odhnoff as their new group credit head, while BNP Paribas SA appointed Peter Medynski as director of loan capital markets in Sydney.
— With contributions from Tasos Vossos.
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