UK Credit Markets on Edge: Tariff Uncertainty Fuels Record CDS Trading

The first quarter of 2025 marked a turning point for UK corporate credit markets, as investors scrambled to hedge against rising risks tied to escalating U.S. tariff policies. Credit default swap (CDS) trading volumes surged to record levels, reflecting a stark escalation in concerns over corporate defaults amid geopolitical and economic turbulence. This shift underscores a critical inflection point for global investors, who are now pricing in the potential fallout from trade tensions that show no sign of abating.

The Data: A 47% Surge in UK CDS Trading
According to the International Swaps and Derivatives Association (ISDA), UK-reported CDS trading volume reached $2.3 trillion in Q1 2025—a 47% jump from the same period in 2024. The rise was driven almost entirely by single-name CDS contracts, which protect against defaults by specific companies. These instruments accounted for a staggering 98% of European CDS notional trading, with UK trades alone comprising 75% of the total European market.

The surge coincides with U.S. President Donald Trump's April 2 announcement of sweeping import tariffs, which pushed effective U.S. tariff rates to 13% by early 2025—up from 3% at the start of the year. Goldman Sachs analysts noted that these tariffs created headwinds for global corporations, raising inflation pressures and squeezing profit margins. Even as some levies were later rolled back, the lingering uncertainty around a July 9 deadline for additional trade negotiations kept markets on edge.

Why the Focus on the UK?
The UK's disproportionate dominance in European CDS trading highlights its unique vulnerability. Unlike the EU, which accounted for just 25% of European CDS notional trading, the UK's exposure to U.S. trade policies is amplified by its post-Brexit reliance on global trade deals. With corporate profits under pressure, investors are pricing in the risk of defaults across sectors—from manufacturing to retail—where supply chains could be disrupted by tariffs.

Example: A hypothetical UK manufacturer's declining stock price and flatlining revenue in 2025, correlating with tariff hikes.

The Bank of America's Q1 investor survey reinforced these fears, with trade tensions and recession risks topping the list of concerns. Meanwhile, the European CDS market overall grew by 28% year-on-year, but the UK's single-name focus suggests a more granular hedging strategy—a sign investors are targeting specific companies rather than broad economic indices.

Implications for Credit Health and Investors
The data paints a clear picture: investors are bracing for a potential credit crunch. While S&P Global Ratings reported stable UK credit card delinquency rates (1.4%) and charge-offs (2.6%), the forecasted GDP growth slowdown to 0.8% in 2025 and rising unemployment (projected to 4.6%) hint at underlying fragility.

For investors, this environment demands caution. First, consider reducing exposure to UK corporate bonds, particularly those with high leverage or global supply chain dependencies. Second, explore shorting UK CDS contracts as a tactical trade—though this carries execution risks. Third, prioritize defensive sectors or sovereign bonds from tariff-insulated economies.

The EU's minimal single-name CDS activity (2% of European volume) suggests investors view the bloc as less exposed to U.S. trade shocks—a divergence that could widen as the year progresses.

Conclusion: Navigating the Tariff Crossroads
The Q1 CDS data is a warning siren. Investors are not just hedging against defaults—they're pricing in systemic risks from a fractured global trade landscape. As the July 9 deadline looms, markets will remain volatile. For now, the UK's corporate credit health hangs in the balance, and the path forward depends on whether policymakers can stabilize trade relations—or if the world slides deeper into a tariff-driven recession.

In such an environment, investors must prioritize flexibility, diversification, and a bias toward liquidity until clarity emerges. The CDS market's record volumes are not just a barometer of fear—they're a call to action.