Tim Leary, Senior Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses the current state of US high yield and private debt markets and what we’ve seen this year.
Watch time: 3 minutes, 33 seconds
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Hello & welcome back to the Weekly Fix. My name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team in Stamford, Connecticut.
I hope all of you were able to enjoy some time over last week’s holiday to rest and recharge. As we look out at this week, we’ll get US Manufacturing PMI, as well as New & Existing Home Sales data, Durable goods and initial jobless claims. So far, the backward-looking hard data has broadly confirmed what we already knew – that the US economy is on strong footing. We shouldn’t lose sight of that point when considering the variety of outcomes that the new tariff regime will present in coming months. WTI crude & Nat Gas are both down about 12-13% YTD. Steel prices have spiked nearly 33% higher, while aluminum is down 7.5%. Lumber prices have been incredibly volatile, at one point up 14% but now down almost 5% on the year. The Bloomberg Dollar Spot index which measures the US dollar index against a basket of 10 leading currencies is weaker by about 7% year to date and about 10% lower than its peak in September 2024. When you factor in a weaker USD and a lower price of oil, which is an unusual circumstance, the move in Crude is even more meaningful. The reality is that there are differing views on how businesses and consumers will react to higher prices of goods and services. For example, what will lower prices at the pump mean while other commodity markets are all over the place?
Of course, tariffs are nothing new. It was Congressional Democrats in the New Deal Era that passed The Reciprocal Tariff Act of 1934 which gave the president more authority to negotiate tariffs. The US led General Agreement on Tariffs and Trade in 1948 was the precursor to what is now the WTO. The WTO ushered in low tariffs and lower prices and it fueled growth in Domestic & Emerging Markets, but it was not without negative consequences to the US manufacturing base. That’s why the US has been steadily implementing tariffs over the last 20 years. President Biden didn’t remove any of Trump’s consequential tariffs and in fact he increased tariffs on certain Chinese imports like EVs and semiconductors. The market expected Trump to expand even further with a reciprocal tariffs hammer but got a bulldozer to global trade instead.
The result is a rise in uncertainty, and an inevitable hit to profit margins across a range of sectors. The S&P down 12 or 13% YTD seems like a reasonable reaction for the time being, but it could easily be down 5 to 10% more before the market realizes this is more of the same--just a lot more than they bargained for. You can expect that companies will continue to revise or pull guidance all together while board rooms get their arms around the new world order. It’s not all bad news, however. The high yield market has been incredibly liquid. It’s behaving as it should as the market has grown & become easier to facilitate client flows & risk transfer. The asset class, just like the US economy, is starting from a healthy standpoint and the widening in spreads and the move higher in yields presents an opportunity to revisit the corporate fixed income as an asset class. The trades that worked in 2024 won’t work again in 2025, but with 88% of the index being Single or BB rated, there are new opportunities to exploit value and you don’t need an overweight to CCC to do the heavy lifting.
As always, thanks for your time & good luck trading.
Key points
Backward-looking hard data largely confirms that the US economy is on strong footing.
The market expected Trump to expand tariffs but got a bulldozer to global trade instead.
US corporate fixed income is starting from a healthy standpoint and the widening in spreads and the move higher in yields present an opportunity.
