Global credit starts to wobble as market pain spreads
Global credit markets began to come under fire on Monday, driving the cost of insuring against corporate and sovereign default higher, as recession fears rippled across equities, commodities and currencies.
Trillions of dollars have been wiped off global stock markets in the last three days, as investors have taken fright at the range and severity of the tariffs unveiled last week by U.S. President Donald Trump.
Fears of a sudden global recession have hit asset markets hard and credit, which is often seen as a warning sign that a deeper downward correction may be approaching, is starting to show the strain.
The five-year credit default swap spread on the iTRAXX Europe Crossover index, which reflects the cost of insuring against the risk of default for 75 of the most traded sub-investment grade companies, shot up by the most in a single day since the banking crisis of March 2023, according to SP Global Market Intelligence data. It hit its highest level since November 2023.
"If we see credit struggling, spreads widening out significantly, precious metals and other havens like the yen or the Swiss franc start to fall significantly, that's when all the alarm bells start ringing," Michael Brown, senior market strategist at Pepperstone, said.
Overnight in Asia, the Markit Itraxx Asia ex-Japan index, comprising sovereign and company debt, rose about 26 basis points to its highest since August last year.
Sovereign spreads in Europe edged up, with those on five-year government for Germany at 15 bps, their highest since January last year, while those for France were at their highest since 2020, according to SP and LSEG data.
Sovereign spreads for China, Vietnam, Indonesia, Thailand and Malaysia also widened, SP Global data showed, hitting, in the case of Indonesia and Thailand, levels not seen since 2022.
Unusually, the pressure on credit has followed, rather than led, a tailspin in world stock markets as Trump declared a trade war by levying the highest tariffs on U.S. imports in over a century.
U.S. equity futures were down nearly 4% by mid-session in Asia and selling in credit came as equity markets from Hong Kong to Sydney were crumbling.
"It's not just the equity market. We've seen credit spreads gap wider materially and we're also hearing various fund flows going the other way as well, as people try to get into cash or other commodities," said Simon Ward, head of debt capital markets for Australasia at Mizuho in Sydney.
He said the debt market would probably enter a "wait and see" mode, with deals on pause as volatility has spiked.
The spread or difference in yield between U.S. Treasuries and the Ice BOFA index of U.S. investment grade debt has widened about 20 basis points since Trump's tariff announcements, and for high-yield U.S. debt it has widened about 96 bps.
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