Investors in the credit market are gearing up to seize potential opportunities arising from the recent volatility in global financial markets, which has been significantly influenced by the ongoing US-China trade tensions. With average spreads in the US high-yield bond market hovering around 419 basis points, the landscape resembles the peaks seen in late 2023. Following President Donald Trump’s announcement of a 145% tariff hike on Chinese imports, prices in the leveraged loan sector have plummeted below 95 cents on the dollar.

Market Reactions to Tariff Announcements

The announcement has already caused a noticeable decline in speculative-grade firms, particularly those in the retail and energy sectors, which are grappling with tariff-related expenses. As these companies continue to face challenges, many investment managers are seeking to strategically increase risk within their portfolios. For instance, Brian Gelfand, co-head of global credit at TCW Group Inc., revealed that the firm has been actively increasing its exposure to high-yield bonds and bank loans across all relevant investment portfolios.

• Key Insights from TCW Group:
  • "The market is fleeing from credits with tariff exposure," Gelfand noted.
  • He emphasized the importance of identifying resilient companies within this turbulent environment to make investments at favorable prices.

Increased Demand for Financing

As more companies report financial distress due to the tariff impact, there is a growing demand for financing. Howard Marks, Co-Founder of Oaktree Capital Management, highlighted in a recent memo that the firm may accelerate investments through their opportunistic debt fund, capitalizing on the heightened demand for distressed assets.

• Financial Trends:
  • An estimated $6.5 billion was withdrawn from loan funds in the week ending Wednesday.
  • US high-yield bond funds experienced their largest outflow in nearly 20 years, with a net withdrawal of $9.63 billion, according to LSEG Lipper data.

Navigating Market Volatility

Market traders are feeling the pressure as fluctuations create challenges in executing trades. One trader characterized the trading environment for European high-yield bonds and leveraged loans as "manic," noting that large volumes were changing hands, yet the bid-offer spread made substantial purchases difficult.

Owain Griffiths, a partner at Sona Asset Management, expressed optimism about long-term opportunities. “The opportunity set has expanded, and we are mobilizing capital to invest in promising situations,” he stated. Griffiths also mentioned a focus on first-lien securities in more stable sectors, such as telecommunications.

Opportunities in Asset-Backed Lending

In a shifting economic landscape, Bruce Richards, CEO of Marathon Asset Management, sees a significant opportunity in asset-backed lending. He pointed out that the "revenue recession" induced by tariffs is making traditional lending metrics less appealing, which could lead to returns of 10% to 12% on a net internal return basis. "Our phones are ringing off the hook," Richards added, signaling strong interest in this area.

As the credit market continues to evolve in response to global economic shifts, investors are staying alert for the next wave of opportunities amidst the chaos.