(Bloomberg) -- Credit investors are eschewing bold bets, with a lack of conviction over the fallout from recent trade ructions dragging volatility toward an all-time low.
A gauge of price fluctuations in credit-default swaps that references North American companies tumbled by almost three-quarters last week to approach its lowest level on record. A similar gauge for European high-grade firms fell to its lowest since mid-2021 and spread moves in corporate bond indexes are quickly calming.
This widespread tranquility in credit markets is emblematic of the caution prevailing among money managers, who are reticent to either add risk or bet on a renewed rout until there’s more clarity with US tariffs. Risk premiums shrunk after their April surge as the White House softened its stance toward creating trade barriers.
“Spreads can remain rangebound until there is a resolution,” said Jamie Newton, head of global fixed-income research at Allspring Global Investments. Instead of big directional bets, Newton is focusing on what he calls “coupon plus” returns, gained by simply holding on to bonds.
Volatility is so low that risk premiums on corporate bonds and contracts that insure them barely moved in recent days, even amid headlines that would normally trigger a swing in the price of risky assets. Last week, US President Donald Trump posted on social media about the difficulty in making a deal with Chinese President Xi Jinping. This was followed by news that the two men held a call.
Meanwhile, US services activity and private-sector payroll figures were weaker than expected, raising the specter of a softer growth environment which could hamper firms’ ability to repay debt.
Global corporate bond spreads have fallen to levels last seen before Trump’s so-called Liberation Day announcements in early April. Thus far, the relatively tight conditions haven’t eroded sentiment toward credit.
“There’s no fundamental reason for a big credit sell off,” said Alexandra Ralph, senior fund manager at Nedgroup Investments. “There’s no one sector that is under distress.”
Even though she does expect spreads to widen until year-end, the move won’t be dramatic as the lack of obvious pockets of weakness make this moment “different to recent cycles.”
Still, bond traders at major banks are taking measures to ensure they stay safe when the next bout of fixed-income turmoil arrives. And some investors are preparing for a potential increase in volatility.
“Following a period when complacency appears to have risen, the firm would not be surprised if volatility doesn’t pick up materially again over the course of the coming month,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.
The Group of Seven meetings held in Canada in June and a July 9 tariff deadline set by the Trump administration could potentially drive volatility higher, he said.
And while the credit market has for now become seemingly impervious to such risks, there are concerns about a blow somewhere down the road if macro headlines impact corporates as well as investor risk appetite, said Christian Hantel, head of global corporate bonds at Vontobel Asset Management.
“This is for me still the most worrisome part,” he said.