Investors are watching carefully as credit market volatility approaches historic lows

The Zhitong Finance App learned that since the subsequent impact of recent trade frictions is still unclear, credit investors are avoiding aggressive betting, resulting in volatility close to the lowest level in history. An indicator reflecting North American corporate credit default swap (CDS) price fluctuations plummeted by nearly three-quarters last week, close to its lowest level on record. Similar indicators for European high-rated companies fell to their lowest level since mid-2021. Interest spreads on the corporate bond index also quickly stabilized.

This widespread calm in the credit market reflects the generally cautious attitude of fund managers. Until the US tariff policy becomes clear, they are unwilling to increase their risk exposure, and they are unwilling to bet on another market collapse. After the US authorities' tariff position softened in April, risk premiums declined after soaring in early April. Jamie Newton, head of global fixed income research at Allspring Global Investments, said, “Interest spreads are likely to remain range-bound until a clear solution is found.” He said that he is more concerned about so-called “coupon interest plus” earnings — that is, the return obtained by simply holding bonds.

The volatility of the credit market is so low that the risk premiums for corporate bonds and their insurance contracts have hardly changed significantly recently, even if there are headlines that usually cause the price of risky assets to fluctuate. Meanwhile, global corporate bond spreads have fallen to the level before Trump's so-called “Liberation Day” in April. So far, the relatively tight market environment has not dampened credit market sentiment.

Alexandra Ralph, senior fund manager at Nedgroup Investments, said: “There is no fundamental reason to trigger a large-scale credit sell-off, and no industry is in obvious trouble.” Although she anticipates that interest spreads will widen before the end of the year, this change will not be too drastic, as there are currently no obvious areas of weakness, which makes the current environment “different from previous cycles.”

However, bond traders at major banks are still taking steps to ensure safety in the next round of fixed income market turmoil. Some investors are also preparing for a potential rise in volatility. Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said: “After a period of market complacency, we won't be surprised to see a significant recovery in volatility over the next month.” He said that the July 9 tariff deadline set by the Group of Seven (G7) meeting and the Trump administration may drive up volatility.

Christian Hantel, head of global corporate bonds at Vontobel Asset Management, said that although the current credit market seems immune to these risks, if macroeconomic news affects corporate fundamentals and investors' risk appetite, there may be a major impact at some point in the future. “This is still the most worrying part for me.”