How Trump’s Tariff Blitz Has Frozen America’s Risky Corporate Borrowers Out of the Bond Market
The landscape of the U.S. bond market has seen tumultuous changes recently, especially for high-risk corporate borrowers who find themselves sidelined since Donald Trump’s announcement of tariffs. This dramatic shift has sent shockwaves through Wall Street, resulting in unprecedented challenges for dealmaking, particularly in the high-yield bond market.
The Shockwave of Tariffs
In early April, President Trump launched his tariff blitz, leading to significant market turmoil and igniting fears of an impending U.S. recession. As a direct consequence, lowly rated companies have been unable to tap into the approximately $1.4 trillion U.S. high-yield bond market. This paralysis concerns private equity firms that often depend on this crucial funding source to finance their acquisitions.
A Freeze on Dealmaking
“Everything has been on hold,” remarked Bob Kricheff, head of multi-asset credit at Shenkman Capital Management. "Nobody is trying to price a deal in this environment." Trump’s aggressive approach to trade has dissuaded investors from backing risky deals, resulting in record outflows from high-yield bond funds following his tariff declaration on April 2.
The Cost of Uncertainty
The fallout from this freeze is palpable. Bankers and investors are now reassessing their funding strategies amid skyrocketing credit spreads—a key risk indicator. According to data from Ice BofA, these spreads reached their highest level in nearly two years, measuring at 4.61 percentage points before retreating slightly after Trump paused some tariffs.
Bank Risks and Investor Hesitations
As a ripple effect, major banks such as Citigroup, Morgan Stanley, and JPMorgan Chase have halted funding deals, leaving high-yield investors hesitant to engage in traditional debt markets. This stagnation raises serious concerns for banks, who now face potential losses from billions of dollars in loans they assumed would be backed by eager junk-bond investors.
"Some existing commitments could get stuck on bank balance sheets," noted Jeff Kivitz, chief investment officer at Canyon Partners, highlighting the precariousness facing the banking sector in this fraught environment.
The Impact on Private Equity
Deals such as HIG’s acquisition of Converge Technology Systems and Apollo-backed ABC Technologies’ takeover of TI Fluid Systems have been put on hold, signaling a broader slowdown in the private equity landscape. Investors are keeping a watchful eye on the prospects for recovery in dealmaking as banks appear increasingly reluctant to loosen their lending grips.
The Shift to Alternative Financing
With traditional bond markets tightening, private equity firms are exploring alternative routes, including private credit funds. Recently, Citigroup paused efforts to raise over $2 billion in high-yield bonds and loans for private equity firm Patient Square Capital, resorting instead to these riskier private funds that demand higher interest rates in return for assumed risk.
BayPine, another private equity group, exemplifies this trend, having recently secured financing for its acquisition of CenExel, albeit at a higher cost through private credit giant Blue Owl.
The Future of Junk Bonds
The big question looming over Wall Street is: what lies ahead for junk bonds? Goldman Sachs has revised its defaults forecast for high-yield and leveraged loan borrowers to 5% and 8%, respectively—considerably higher than pre-tariff projections.
Statistics paint a stark picture: Just $13 billion in high-yield bonds and loans have been issued in the current month—well below the average of $52.5 billion since 2023. The wait-and-see approach taken by bankers and investment firms highlights the precarious balance within the financing ecosystem.
Conclusion: Looking Ahead
As the U.S. navigates this uncertain financial terrain, the chilling effect of Trump’s tariff policies continues to reverberate, placing immense pressure on Wall Street and leaving corporate borrowers scrambling to find pathways back into the bond market. The ongoing volatility poses a crucial question: will the market stabilize enough to restore investor confidence, or will we witness further disruptions in the realm of corporate finance?
For insights on current trends in the high-yield bond market, check out this detailed report on high-yield bonds and stay updated on the rapidly evolving landscape of corporate finance.
