For much of the year, money managers have embraced optimism and snatched up corporate bonds, sending valuations to ever more expensive levels. Now, Wall Street titans are saying it’s time to focus on how bad things can get.
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Josh Easterly, co-founder and co-chief investment officer of Sixth Street Partners, are among those warning that the credit market may not be pricing in enough risk. And the lowest rung of junk bonds are flashing warnings that the US economy could soon face slower growth and higher inflation, as well as the possibility of a recession.
Risk premiums on junk bonds rated in the CCC tier have widened 1.56 percentage points this year, and 0.4 percentage point in the latest week. The gap between spreads on CCCs and the next tier above them, Bs, has been widening this year and in the last two weeks, signaling that the weakest bonds are lagging.
The CCC widening and underperformance are red flags, said Connor Fitzgerald, fixed-income portfolio manager at Wellington Management, a firm that oversees more than $1 trillion of assets.
“I wouldn’t recommend somebody make a big move into high yield today, because spreads are tight and if you think there’s concern about a recession, you risk default-related losses,” Fitzgerald said in an interview.
Dimon, who was early to spot risks in the mortgage market during the US housing bubble, said on Monday that credit spreads aren’t accounting for the impacts of a potential downturn. He added that the chances of elevated inflation and stagflation are greater than people think and cautioned that America’s asset prices remain high.
Credit is a “bad risk,” Dimon said at JPMorgan’s investor day. “The people who haven’t been through a major downturn are missing the point about what can happen in credit.”
Yet investors are still buying at least some junk bonds. CoreWeave Inc., an AI cloud hosting firm, sold $2 billion of five-year notes on Wednesday, finding enough demand to boost the size of the offering from $1.5 billion. And in the US investment-grade market, companies sold more than $35 billion of bonds this week, topping dealers’ forecasts of around $25 billion.
Corporate debt has rallied since the violent swings of April, partly because investors have had cash from maturing securities to reinvest into the credit market, said Blair Shwedo, head of fixed income sales and trading at U.S. Bank. But geopolitical tensions and tariff uncertainty could hurt demand for company debt and cause spreads to widen.
Market sentiment can shift quickly. In April, days after US President Donald Trump announced the steepest tariffs for the country in a century, spreads climbed to their widest since March 2020. Soon after that, they tightened again.
There are many risks ahead. US President Donald Trump on Friday threatened a 50% tariff on goods from the European Union starting next month, signaling trade wars are far from settled. The Federal Reserve’s interest-rate path is also unclear, as is when, or if, economic data will start to show signs of deteriorating.
“Lack of clarity on growth and trade and geopolitics should be reflected in spreads,” said Sixth Street’s Easterly, who is particularly concerned about floating-rate debt. “Risk is not being appropriately priced today in credit.”
