(Bloomberg) — 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.
Most Read from Bloomberg
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.”
High-grade credit derivative indexes for North American and European credits widened in the latest week, after US President Donald Trump threatened to impose a 50% tariff on the European Union, ramping up trade war rhetoric again.
Chinese developer Country Garden Holdings Co. has secured backing from nearly 75% of bondholders for its offshore restructuring.
The giants of corporate America from Pfizer Inc. to Alphabet Inc. are borrowing in euros like never before as the anxiety triggered by Trump’s tariff threats pushes them to hunt for alternative funding avenues in case their home market freezes up.
Apollo Global Management is financing its acquisition of PowerGrid Services from Sterling Group with a nearly $1 billion debt package from Brookfield Asset Management, Blackstone Inc., and JPMorgan Chase & Co.’s direct lending businesses.
US mortgage bonds weakened after Trump said he’s looking at removing Fannie Mae and Freddie Mac from government backing, yet reaction was relatively muted and reflected investor faith that any changes will come slowly and won’t disrupt the market.
Private capital firms are increasingly using collateralized fund obligations to raise cash, as they slice and dice private portfolios into bonds with top ratings, allowing issuers to borrow cheaply against illiquid assets.
Private credit firms are seeing an opportunity to finance everything from public transit systems to local utilities as the federal government and banks pull back on funding.
Sunnova Energy International, a seller of rooftop solar-panel systems, is laying the groundwork for a bankruptcy filing that could happen within the coming weeks.
Former Ares Management Corp. partner Scott Graves has assembled a team to help run Lane42 Investment Partners, the asset manager he launched this year with $2 billion of capital commitments from Millennium Management. Lane42 will invest across public and private credit markets and offer tailored financing for both healthy and distressed companies.
Jim Boland, who spent nearly two decades at UBS, is joining Mizuho Financial Group Inc.’s team in New York. Boland will be a managing director overseeing debt capital markets, and joins from The Benchmark Company, where he has worked since 2021.
Jefferies Financial Group Inc. is hiring industry veterans to bolster its emerging markets team after several high-profile traders and salespeople left in a shakeup earlier this year. Rafael Madrid, former co-head of emerging-market credit trading at Morgan Stanley, and Anton Hobbs, a London-based credit sales executive from Citigroup Inc. are set to join.
Clear Street is launching a trading desk to help asset managers, hedge funds and family offices outsource some of their trading business, tapping talent from UBS Group.
Barclays Plc hired Marc Warm from UBS Group as the third co-head of its global capital markets business as the British lender seeks to grow its investment banking franchise. New York-based Warm will co-head the division along with Tom Johnson and Travis Barnes.
Canadian Imperial Bank of Commerce hired Manav Suri to lead commercial real estate credit in the US as it continues to bolster its structured-credit team in the country. Suri was managing director, head of real estate capital solutions, at MUFG Bank Ltd. until August 2023.
Ares Management Corp. partner Bryan Southergill, who focuses on Asia credit, is leaving by the end of June. Hong Kong-based Southergill has worked on real estate-related credit investing at Ares since August 2022, and was previously a managing director on KKR’s real estate team in Hong Kong.
—With assistance from James Crombie and Dan Wilchins.
