The Long and Short

Anatomy of the tariff selloff in credit

| April 11, 2025

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The anatomy of the selloff so far in investment grade credit offers some important guidelines for potentially rocky markets ahead. Month-to-date excess returns tell the story by sector, rating and duration. Though the recent 90-day pause on tariffs potentially marks progress, risk markets are clearly contemplating the longer-term dilemma of a drawn-out trade war with China as well as the impact of continuing tariffs on key imports from Canada and Mexico, such as automotive. Many of those elements echo the experience of 2018, which saw markets move steadily wider over the course of that year.

Since “Liberation Day” on April 2, the investment grade index has gapped out just 21 bp, a relatively modest move historically but an abrupt jolt to a credit market that has been extremely steady for the better part of a year. The index hit a wide spread of 119 bp over the Treasury curve on April 8, prior to the 90-day pause announcement. Credit default swaps (CDS) have been harder hit, with the IG CDX index moving from a spread of 60 bp to 73 bp, hitting a wide of 81 bp, and exhibiting more drastic swings in individual CDS of higher beta credits than cash markets.

Looking at how the spread curve has changed since the selloff began, earlier in the week spreads indicated a significantly flatter 10s/30s curve relative to the end of last month but in the last day or so the relationship steepened back out a bit (Exhibit 1).

Exhibit 1: US Treasury and IG credit curves change through April

Source: Santander US Capital Markets LLC, Bloomberg LP

Since the selling began, the hardest hit sectors of the index include energy, finance companies, basic materials, brokers/asset managers, and REITs, all surprisingly underperforming the consumer cyclical sector dominated by autos (Exhibit 2). Meanwhile, the segments of the market that have demonstrated the most relative stability in the investment grade market in the face of tariff uncertainty include natural gas, utilities, transportation, consumer non-cyclical and insurance. It seems likely these sector trends would persist on a longer-term basis in the event that the ongoing tariff uncertainties persist or escalate over the months ahead.

Exhibit 2: Post-tariff excess returns by sector

Source: Santander US Capital Markets LLC, Bloomberg Investment Grade Corp Bond Index

Meanwhile, again with limited surprise, high beta credit has been hit drastically harder than the higher-rated counterparts in the index (Exhibit 3). This has been highly evident in day-to-day swings in the cash markets as well individual CDS levels. Investors are seeking flight-to-quality strategies in the corporate bond market, particularly as US Treasuries proved less defensive in the early days of the tariff related volatility.

Exhibit 3: Post-tariff excess returns by rating

Source: Santander US Capital Markets LLC, Bloomberg Investment Grade Corp Bond Index

The last breakout of the investment grade index is by duration, demonstrating more notable credit selling further out the curve, but with 7- to 10-year maturities selling off slightly more than longer maturities toward the end of the week (Exhibit 4).

Exhibit 4: Post-tariff excess returns by duration bucket

Source: Santander US Capital Markets LLC, Bloomberg Investment Grade Corp Bond Index

For total return investors that may be looking to free-up cash to deploy to more defensive corners of the corporate bond market, the recent back-up in longer-dated treasuries may provide a window of opportunity. There is no shortage of deeply discounted bonds in the investment grade corporate bond index. The extended period of artificially low rates that stretched from the early days of the pandemic in 2020 on into 2022 provided a massive wave of issuance for corporate borrowers that remains a major component of the secondary market. As rates moved higher in subsequent years, the strategy of targeting discounted bonds has been important to total return investors for the past two and half years. Now that rates have backed up and could be trending toward their January peaks, investors can selectively execute lower dollar swaps in the same or similar issuers, while taking out points and redeploying capital elsewhere in the market. Investors need to be cognizant of achieving appropriate spread compensation for the give-up in yield, but ongoing dislocation in the markets can provide opportunities to execute swaps into lower dollar securities, particularly as rates have been highly responsive to tariff related headlines.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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