Goldman Lifts US Junk, Loan Default Forecasts on Tariff Woes

The financial landscape is shifting rapidly, and the latest developments in the US junk bond and loan markets are a clear indication of the turbulence ahead. Goldman Sachs has raised its forecasts for US junk bond and loan defaults, citing the escalating trade war and the resulting tariff woes as the primary culprits. The situation is dire, with more than $43 billion of bonds and loans now trading at distressed levels, making refinancing a daunting task for many companies.

The tariff policies implemented by Donald Trump have sent shockwaves through the global economy, and the US is feeling the brunt of it. The recent announcement of a 10% base tariff on all exporters to the US, along with additional levies on about 60 countries including China, Vietnam, and Bangladesh, has left investors scrambling to assess the impact on their portfolios. The retail sector, in particular, is feeling the pinch, with companies like Michaels, Wayfair, Nordstrom, and Claire’s seeing their bonds tumble in value. The owner of luxury department store chain Saks Fifth Avenue is also among the biggest additions to the distressed universe, with a $2.2 billion bond now trading at a significant discount.

The impact of these tariffs is not limited to the US. In Europe, carmakers like Aston Martin and components manufacturers are also feeling the heat. Bonds of companies like Antolin, Standard Profil, Adler Pelzer, ZF Friedrichshafen, and Forvia have all tumbled this week, highlighting the interconnected nature of the global economy.

The uncertainty surrounding these tariffs has investors on edge, with mounting concerns about the economic impact. The higher the tariffs, the greater the potential hit to growth. For example, U.S. consumer confidence fell to a four-year low in March, largely due to trade policy uncertainty. Our Investment Bank estimates that the impact of the proposed tariffs varies by type, ranging from -0.1% to -0.7%. The U.S. might also feel the impact more acutely than the rest of the world, as tariff threats have expanded beyond earlier targets like China and specific sectors. By engaging in global trade wars, the U.S. risks losing its size advantage.

The potential long-term effects of increased loan defaults on the broader US economy are significant. As noted by JPMorgan Chase CEO Jamie Dimon, the combination of rising interest rates, sticky inflation, and widening credit spreads could lead to more credit problems, including defaults by borrowers. This scenario is supported by data showing that the US economy is poised for its first negative quarter since Q3 2023, with international markets also feeling the pressure. The Stoxx Europe 600 fell -1.4% on the week, extending its outperformance over the S&P 500 to nine consecutive weeks, the longest streak since 1999. This economic slowdown could lead to a significant decline in economic activity, spread across the economy and lasting more than a few months, which is the technical definition of a recession.

The impact of loan defaults on the economy is not limited to direct financial losses. As consumers and businesses struggle to repay their debts, they reduce their spending, which makes up about 70% of economic activity. This spending pullback is likely to dampen company sales, causing some firms to fail to make debt payments and default on loans. For example, the auto industry is especially vulnerable, with rising prices and increasing loan risk. Economists warn of a potential 2025 recession if debt and spending trends continue, as rising consumer debt, combined with tariff-driven inflation, could reduce household spending—the primary engine of the US economy.

In terms of investment strategies, the potential for increased loan defaults and a recession suggests a shift towards more conservative and defensive positions. Investors may want to consider allocating more of their portfolios to high-quality core fixed income, such as sovereign bonds and investment-grade credit, which could benefit from a dovish policy environment. As noted in the Portfolio Construction article, "Fixed income is front and center across various scenarios... In a soft-landing scenario, with moderate labor market weakness and growth staying slightly above trend, continued positive inflation would enable central banks to keep cutting rates, allowing bonds to potentially rally further." Additionally, investors may want to consider a dynamic investment approach across sectors and regions, as well as strong risk management, to navigate the uncertainties created by potential changes to US policy governing tax, trade, fiscal issues, and regulation.



The situation is fluid, and the outlook remains uncertain. However, one thing is clear: the tariff policies implemented by Donald Trump are having a significant impact on the credit risk of US junk bonds and loans, and the potential for increased loan defaults and a recession is a real and present danger. Investors would do well to tread carefully and consider the potential long-term effects of these developments on their portfolios.