#MacroFriday: Credit Spreads Defy Signs of Economic Turbulence

A single post on Truth Social or X can reshape economic policies the broader business climate. As uncertainty around the U.S. economy intensifies, investors may begin to demand higher risk premiums. Yet, high-yield spreads remain remarkably tight.

President Trump continues to escalate tariff threats, a strategy that eventually will lead to a squeeze of corporate profit margins and fuel inflation for U.S. consumers. On Wednesday, he announced a new round of import tariffs, 25% on cars and car parts, which is likely to provoke retaliatory measures from America’s trading partners. All eyes are now on April 2nd, with growing anticipation over how far these ‘reciprocal’ tariffs will extend. EU Trade Commissioner Maroš Šefčovič has already warned that Trump may impose a 20% tariff on EU exports to the US. An uncertain and highly volatile policy climate is far from ideal for companies make investment decissions.Heightened risk and unpredictability tend to discourage long-term capital expenditure, and this could weigh heavily on global economic growth prospects.

At the same time, domestic sentiment in the U.S. is weakening. The March flash manufacturing PMI fell again, indicating a cooling in industrial activity. Meanwhile, the Consumer Confidence Expectations Index, which measures short-term expectations for income, business conditions, and the labor market, has plunged to its lowest level in 12 years. Historically, spikes in the Economic Policy Uncertainty Index have often preceded economic slowdowns or even recessions. The current level of policy uncertainty is approaching that seen during the early stages of the COVID-19 outbreak. More narrowly, trade policy uncertainty has surged to record highs, surpassing levels observed during the 2019 U.S.-China trade war.

In financial markets, such uncertainty typically manifests in rising risk premia. While equity valuations may come under pressure, spreads between government bonds and riskier instruments, such as high-yield corporate bonds, also tend to widen. For now, however, high-yield spreads remain unusually tight, suggesting that market participants are still relatively complacent. But that calm may prove deceiving, these spreads can be highly flammable under the right conditions.