"Trump Put" Will Limit Corporate Bond Spread Widening, BofA Says

In the volatile markets of 2025, corporate bond investors are grappling with the dual forces of trade policy uncertainty and the "Trump Put"—a phenomenon where market-moving presidential actions temper downside risks. Bank of America (BofA) analysts argue that while tariffs have rattled corporate bond spreads, the Trump administration’s habit of pausing or scaling back punitive measures will limit how much spreads widen. This dynamic creates a paradox: markets fear tariffs but rely on their eventual retreat to stabilize valuations.

The "Trump Put" in Action

The term "Trump Put" refers to the perception that markets will stabilize whenever President Trump’s policies—often announced abruptly—trigger panic. In 2025, this mechanism emerged most clearly during his April 2 tariff announcement, which initially sent corporate bond spreads soaring. Investment-grade (IG) spreads widened to 146 bps, while high-yield (HY) spreads spiked to 497 bps, the highest since the 2023 regional banking crisis. However, markets rebounded sharply after Trump delayed the tariffs by 90 days—a move BofA analysts likened to a "policy put."

By mid-April, IG spreads had tightened to 129 bps, and HY spreads narrowed to 425 bps, reflecting investor relief. BofA’s CreditSights division notes that spreads remain elevated due to lingering inflation fears and trade risks but are unlikely to hit crisis levels unless tariffs are fully implemented.

Sector-Specific Risks and Opportunities

The bond market’s stratification highlights investor preferences for safety. BBB-rated issuers, often seen as near-junk, face an average 3 bps premium over higher-rated peers—a sign of reduced risk tolerance. Conversely, sectors insulated from trade wars, such as business services and generic drug distributors, are outperforming.

• Business Services: BofA analysts initiated coverage of this sector, citing its defensive traits. Companies like drug distributors benefit from pricing power and regulatory tailwinds. For instance, generic drug inflation—driven by reduced FDA oversight—could boost earnings by 1% for every 1% price increase.
• Deregulation’s Role: Trump’s "Unleashing Prosperity" executive order mandates removing 10 regulations for every new one. This has cut compliance costs for manufacturers, offsetting tariff-driven price hikes. The EPA alone announced 31 deregulatory actions in a single day, easing burdens on energy and industrial firms.

The Tariff Trap and Earnings Pressure

Despite the "Trump Put," tariffs remain a systemic risk. BofA’s equity team warns that China tariffs could slice S&P 500 earnings by 15%, with every 1% drop in real GDP further reducing EPS by 5-6%. This creates a precarious balance: markets stabilize when tariffs are delayed but face renewed pressure when negotiations stall.

Investor Strategy: Navigate Volatility with Caution

BofA advises investors to prioritize quality and liquidity:
1. Favor High-Quality Debt: IG issuers, particularly those in defensive sectors, offer safer havens.
2. Avoid Tariff-Exposed Sectors: Autos, tech, and industrials face disproportionate risks from supply chain disruptions and price inflation.
3. Monitor Policy Signals: The 90-day tariff pause is a microcosm of the broader dynamic—investors must remain agile to capitalize on policy-induced volatility.

Conclusion

While the "Trump Put" has dampened the worst-case scenarios for corporate bond spreads in 2025, the path ahead remains fraught with uncertainty. BofA’s analysis underscores that spreads are unlikely to widen beyond 130 bps for IG and 450 bps for HY due to periodic policy interventions. However, prolonged trade disputes or a failure to resolve inflation could test these boundaries.

The data tells the story:
- IG spreads tightened by 17 bps in April despite initial tariff-driven spikes.
- HY issuance fell to $7.9 billion in April—the lowest since 2008—highlighting investor caution.
- Regulatory relief has cut compliance costs for manufacturers by 2 percentage points since 2023.

For now, the "Trump Put" remains a critical support mechanism. Investors who balance quality exposure with policy vigilance can navigate this choppy market—and perhaps even profit from the volatility.