US High-Yield Bond Market Points to Continued Economic Strength Despite Tariff Concerns

High-yield bond market signals strong US economy outlook, with low bond spreads indicating investors don't see much reason to worry about the future. Despite concerns over President Trump's tariffs, high-yield bond investors remain calm, suggesting a bullish sentiment similar to the stock market. This risk-wary market is seen as a positive indicator for the US economy.

The high-yield bond market is signaling a strong outlook for the U.S. economy, despite ongoing concerns over President Trump's tariffs. Low bond spreads, which indicate investors' confidence in the economy, suggest that bond investors are not worried about the future. This risk-wary market is as bullish on the American economy as the stock market, according to industry experts [1].

High-yield corporate bonds, often referred to as junk bonds, are particularly vulnerable to default during economic downturns. However, investors are currently paying a premium over comparable Treasurys for taking on these risks, indicating that they do not expect a recession. The spreads on these bonds are lower than at any point in 2021, when confidence in the U.S. economy was very high due to pandemic-era fiscal and monetary policy [1].

DataTrek Research co-founder Nicholas Colas noted that the high-yield corporate-bond market reflects the same sort of optimism that U.S. large-cap stocks are currently showing. Given that bond investors are generally more cautious than their equity market counterparts, this is seen as a bullish signal for stocks [1].

Despite the possibility of tariffs raising inflation and negatively affecting the economy, high-yield bond investors remain calm. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) saw a total return of 5% in the first half of 2025, while the SPDR Bloomberg High Yield Bond ETF (JNK) gained a total 4.8% over the same period [1]. June was a particularly strong month for high-yield bonds, with the JNK fund returning a total 2% [1].

Michael Chang, head of high-yield credit and senior portfolio manager at Vanguard, noted that valuations are "pretty stretched" in the corporate credit market. However, he believes that junk-bond spreads may remain low for a while, as the U.S. may avoid an economic downturn. The U.S. junk-bond market currently provides an annual yield of around 7%, although this may ebb and flow with movement in spreads [1].

The U.S. high-yield bond market retreated modestly on Tuesday, while major equities benchmarks mostly fell. The Dow Jones Industrial Average (DJIA) closed 0.4% lower, while the S&P 500 slipped 0.1% and the Nasdaq Composite (COMP) eked out a gain of less than 0.1% to finish nearly flat [1].

The high-yield bond market's calm demeanor is also reflected in the Treasury yields, which have remained relatively tranquil despite Trump's tariff updates. This suggests that investors are not overly concerned about the deficit or mounting U.S. debts [2].

When Trump's 90-day pause on U.S. tariffs ends on Wednesday, bond investors are expected to take a more cautious approach, rather than panic-selling credit. This is due to the belief that the government will find some resolution to any impasse in tariff negotiations, as seen after the "Liberation Day" tariff announcement in April [3]. The conviction in the fundamentals of high-yield bonds is so strong that even extreme geopolitical events have not pushed junk bond credit spreads or the default risk gauge wider [3].

In conclusion, the high-yield bond market is providing a strong signal of confidence in the U.S. economy, despite ongoing concerns over tariffs. This bullish sentiment is reflected in low bond spreads and the strong performance of high-yield bonds in recent months.

References:
[1] https://www.morningstar.com/news/marketwatch/20250708223/how-junk-bonds-are-signaling-the-same-optimism-about-the-us-economy-as-stocks
[2] https://www.businessinsider.com/junk-bonds-stock-market-outlook-economy-yields-inflation-treasurys-2025-7
[3] https://finance.yahoo.com/news/analysis-investors-double-down-us-141835828.html