US high yield: What we can learn from April’s tariff turmoil

When Donald Trump returned to the White House, investors braced for how markets might react to a renewed escalation of global trade wars. 

While uncertainty was ubiquitous, we however maintained the view that the US high yield (HY) market was starting from a point of strength, allowing it to remain relatively resilient to any fall out. 

In April, following the so-called ‘tariff tantrum’, this opinion was borne out as the asset class demonstrated a high level of stability relative to harder-hit equity markets.

In all, year to date, the US HY market’s daily annualised volatility rate comes in at 4.8% compared to a far steeper 28.9% for the blue-chip S&P 500 and 30.3% for the Russell 2000.¹  Equally in pure investment return terms, the broader high yield universe remains in positive territory while both US indices are down.²

We believe there are both fundamental and technical reasons why the US HY sector has demonstrated this level of strength.

What did we see from a sector perspective during April?

Following Trump’s Liberation Day, there was a clear differentiation of returns from those companies directly impacted, and those that were not. And while it isn’t always accurate to look at such movements from a sector level, it does however offer some guidance.

It generally played out as expected; consumer goods and retail spreads widened and endured more volatility while, albeit not directly related to tariffs, the energy sector suffered from negative headlines around Opec’s announcement to hike output. From a cyclicals’ perspective we saw better relative value opportunities emerge from the weakness. Meanwhile, the more domestically focused services sector was unsurprisingly a better performer over this volatile period.

Anecdotally, the market remains difficult for both investors and corporations, especially in certain sectors. From the conversations we have had with management teams, the feedback has been mixed on the current outlook. We have seen many companies continue to beat expectations in Q1 earnings, while others who are more intertwined with global trade and have a significant portion of manufacturing overseas in tariff-hit countries, are facing more uncertainty and have pushed out guidance.

More positively, we are still seeing some companies with reliance on discretionary consumer spend, such as cruiselines and casinos, put out good numbers and positive guidance. However, there has also been a tempering of expectations from others – including manufacturers, building materials and construction – some of which were already facing a difficult market environment prior to the tariff announcement. But while the picture remains mixed, we are continually trying to connect the dots between the soft and the hard data. 

What does the technical environment tell us?

Technical factors have been exceptionally strong. Take the period from 2022 to 2024, where we had over US$460bn of excess demand in this market which is significant against the size of the asset class that began that period at $1.9tn.³

A big driver of this has been the rising star versus fallen angel dynamic, with rising star volumes dwarfing fallen angels over the last three years. We expect the balance between the two to be more equal this year, with several large capital structures on either side likely to determine the ultimate trend. Other important sources of demand are coming from the accumulation of coupon income being mechanically reinvested into the market, as well as from cash balances that had been built up which are continuing to be deployed.

Even during the April period, there wasn’t a lot of forced selling - trading was orderly. Despite the primary market temporarily slowing down, we still saw a large deal priced in an economically sensitive sector which enjoyed very strong demand.

While primary deal levels are down, this seems to be on the issuer side of the equation and not a reflection of demand. Opportunistic issuers have stepped aside for the time being but new deals that need to get done are still being met with solid demand if priced appropriately. 

How do recent events impact the default rate expectations?

Despite what we experienced in April, we are not adjusting our expectations on default rates from a bottom-up analysis perspective. We expect defaults will continue to be in the low range of 1% to 3% and be idiosyncratically driven.

However, it is trickier to know how investors’ market perception will change. The more calls that we see for an economic slowdown and potential recessions, the more the top-down driven expectations will start to demand a higher risk premium on high yield bonds.

We have already seen a couple sell-side banks raise their defaults rates for this year and next, but we still expect defaults to remain in line or below the long-term average. Bottom-up analysis, not top-down macro forecasts, remains the key to understanding where the default rate goes from here.

Where to look across different US high yield strategies

Over the past two years, the lower quality part of the US high yield market has outperformed the higher end. So far in 2025, there has been a reversal of this trend, and the BB-rated segment has been the strongest performing part of the market.  With uncertainty likely to continue, many investors may wish to look at opportunities at the higher quality end of the market.

Given that the B/BB index has outperformed the full credit spectrum US HY index year to date⁴ , this part of the market may offer investors higher credit quality option within the US HY asset class.

Bond yield levels remain attractive but, with the current environment, investors are also interested in mitigating against the downside. So, for those wishing to mitigate interest rate risk as well as seeking attractive yields, short duration bonds by their nature can potentially help with this.

At the other end of the high yield risk spectrum, April’s market weakness allowed us to start rotating our more dynamic, high conviction strategies from a more defensive positioning into higher total return seeking opportunities. This might appeal to investors concerned about the growth outlook and implications for more volatile equity markets, as a replacement for equity exposure or complement to existing high yield strategies.

Overall, despite a more challenging environment to navigate, we continue to believe that the attractive income offered by high yield through the all-in yield does offer a fair compensation for the uncertainty, even if the road ahead will remain bumpy.