Junk Bond Spreads Narrow to 2.88%, Signaling Economic Optimism

The junk bond market in the United States is mirroring the optimism seen in the stock market, despite the economic uncertainties. The spread between junk bonds and government bonds has narrowed to a historical low of approximately 2.88 percentage points, the lowest level since 2021 and only slightly higher than the low point recorded in January of this year. This indicates that investors remain confident in the economic outlook.

The narrowing spread reflects a similar optimism to that seen in the stock market. Bond investors are typically more conservative than stock market investors, so this optimism is seen as a bullish signal for the stock market. The strong performance of junk bonds further underscores the high level of economic confidence. A low spread generally indicates that investors do not expect the economy to enter a recession, even with recent market volatility caused by tariff policies.

The junk bond market's strong performance in the first half of 2025 further supports this optimistic outlook. According to data, the iShares iBoxx Dollar High Yield Corporate Bond ETF had a total return of 5% for the first half of the year, while the SPDR High Yield Bond ETF achieved a total return of 4.8% for the same period. The latter's single-month return in June was 2%, the best monthly performance since July 2024.

The head of high-yield credit and senior portfolio manager at a prominent investment firm described June as an "excellent month" for high-yield bonds. Despite concerns about the impact of tariff policies, industry experts believe that their effect on the U.S. economy is manageable. The final impact of tariffs is unlikely to trigger a U.S. economic recession. If a scenario that could lead to a recession were to occur, the junk bond spread would widen, affecting returns. However, the market has not shown any signs of this happening.

High-yield bond spreads are generally "tight," and corporate credit valuations are "overall quite tight." Given the possibility of avoiding an economic downturn in the U.S., junk bond spreads may remain low for some time. "The sky is cloudy, but it's not a storm," said the senior portfolio manager. "The economy may slow down due to tariffs, but it won't reach the level of a recession. This is acceptable for high-yield bonds."

Currently, the annual yield on U.S. junk bonds is approximately 7%, but this figure fluctuates with changes in the spread. Compared to the period before the 2008 global financial crisis, the U.S. high-yield bond market is now composed of higher-quality credit. Due to the potential impact of tariffs not yet fully materializing, the senior portfolio manager remains cautious about the retail sector, which faces tax exposure. As the market absorbs more tariff news in the coming days, "increased daily volatility will not be surprising."

The senior portfolio manager also expressed optimism about domestically focused defensive high-yield sectors such as healthcare, food and beverage, and utilities, which can help mitigate potential volatility caused by tariffs. These sectors are seen as more resilient to economic fluctuations and can provide a stable return for investors.