MacroResearchBoard

Take Profits On U.S. High Yield – April 7, 2025

An MRB report published early last week argued that U.S. corporate bond spreads are at risk of widening materially if the recent risk-off phase persists, especially if a material growth scare develops.

The U.S. economy came into this year on a very solid footing but is now being threatened by the U.S.-led trade war. U.S. corporate bonds have held up reasonably well, but the surge in economic policy uncertainty heralds a material widening should such uncertainty progress into a significant economic slowdown. We recommend tactically paring back corporate bonds within fixed-income portfolios until there is greater clarity on where the trade war is heading. This also means tactically upgrading government bonds.

In a material growth slowdown scenario, we expect U.S. high-yield corporate bond spreads to widen by as much as 225 bps (and much wider in a recessionary outcome). The partial offset is that government bonds yields could fall by another 50 bps in a growth scare, although downside is limited barring a recession due to elevated inflation and sizable debt issuance.