Credit Risk Drops in a Knee-Jerk Reaction to Trump’s Win

Credit risk fell in reaction to Donald Trump’s US presidential win, even though his presidency may be marred by tariffs and possible trade wars.

The Markit CDX North American High Yield Index, which rises as credit risk declines, rose 0.62 point to 107.93, its highest since January 2022. The spread on a similar gauge for investment-grade debt tightened 2.3 basis points to 49.6 basis points, the narrowest in nearly seven weeks.

By 8 a.m. New York time, nearly $12 billion had already been traded in the two main credit derivatives indexes in the US, data compiled by Bloomberg show. For the investment-grade index, that was more than 22 times the usual trading volumes at that time of day.

High-yield bonds and derivatives were outperforming their investment-grade peers, according to a Wednesday note from JPMorgan Chase & Co. analysts including Eric Beinstein. They said investors will likely focus on tariff risks to multinationals and some foreign-based dollar bond sellers, whose presence is larger in the high-grade market than in junk.

“The combination of higher rates, light dealer positions and election uncertainty mostly over is likely to be a catalyst for more buying,” according to JPMorgan.

There’s been a knee-jerk reaction to a rally across assets, including stocks and Bitcoin, with bets that Trump’s pro-business stance will boost the US economy. Treasury yields surged, and the drop in credit risk is also due to relief that Trump’s win looks set to be clear-cut, according to Michael Koehler, credit strategist at Landesbank Baden-Wuerttemberg.

In Europe and Asia, the cost of protection against corporate defaults dropped the most since early September, with the iTraxx Europe index of high-grade names 1.8 basis points tighter at 56 basis points. Insurance costs for European junk-rated companies also declined, and an index of Asian high-grade dollar debt was as much as 3.3 basis points tighter overnight.

The move in European CDS indexes is “a bit surprising at first glance because in the mid-to-long term, the election result is negative news for Europe and especially Germany,” Koehler said. “Trump stands for tariffs, he made that crystal clear. We expect further trade wars and at least arguments about tariffs. Europe is a very open economy, Germany is even more open. We would be hurt by any barriers.”