Five weeks ago, markets and businesses were bracing for the worst. Donald Trump‘s sweeping April 2 tariff announcement sparked panic across equities and credit markets, igniting fears of a trade-driven recession.
But fast forward to mid-May, and the last traces of that economic pessimism have been wiped out. From credit spreads to the traditional Wall Street’s stress indicator, the message is clear: Investors are no longer pricing in a U.S. recession.
Tariff-Driven Credit Risk? Gone
High-yield bond spreads — one of the market’s most reliable gauges of economic stress — have returned to pre-tariffs levels.
The spread between U.S. high yield corporate bonds and Treasurys has dropped from 4.7 percentage points in early April to just 3.1 percentage points, now below the three-year average of 3.86. This signals investor confidence in even the riskiest borrowers’ ability to meet debt obligations.
“During a huge risk-on advance, US High yield spreads have tightened 152 bps since April 7. With spreads now at 309 bps above Treasuries, credit market investors are back to pricing in a very optimistic outlook with no recession and few defaults,” Charlie Bilello, chief market strategist at Creative Planning, wrote in a post on X.com.
Even in the riskiest corners of the market, sentiment has flipped.
CCC-rated bonds, which sit just above default …