Trump's Tariffs May Trigger a Credit Crisis? Goldman Sachs Raises Expectations for US Junk Bonds and Credit Defaults

As US President Trump recently wielded the "tariff stick" globally, it not only disrupted global trade order and financial market stability, but also caused significant impact on the US's own economic prospects and business environment.

Recently, strategists at Goldman Sachs raised their risk forecasts for debt defaults by US junk bond issuers and leveraged loan borrowers, citing widening credit spreads and the substantial impact of the Trump administration's reckless tariff policies on the US.

This indicates that investors are increasingly concerned that a US economic slowdown will hit US companies, and a credit crisis may be quietly approaching.

Rising Credit and Junk Bond Default Risks in the US

According to a report released by Goldman Sachs credit strategists Lotfi Karoui and others, they significantly raised their forecast for the default rate of US leveraged loan borrowers to 8% by year-end, up from 3.5%, while also increasing the default rate for US junk bond issuers to 5%, up from 3%. They wrote: "The positive correlation between interest rates and spreads has also introduced new headwinds unfavorable to credit returns." For borrowers rated CCC, "given the recent widening of spreads, the economic outlook for refinancing looks bleak."

According to Standard & Poor's rating of bonds and issuers, a CCC rating means the issuer's ability to repay debt is highly dependent on a favorable economic environment, with a very high risk of default.

Last Friday, Eastern Time, after Trump announced a temporary suspension of reciprocal tariffs on most countries, US stock and bond markets still saw sell-offs, highlighting investors' concerns about Trump's erratic decision-making style.

Junk Bond Premiums Have Rapidly Surged

On April 3, Eastern Time, the day after Trump's so-called "Liberation Day," the yield premium (a measure of default risk) that investors demanded for holding speculative-grade corporate bonds (junk bonds) relative to US Treasuries surged by 100 basis points to 445 basis points.

This was the largest increase in yield spreads since the outbreak of the COVID-19 pandemic in 2020, even surpassing levels during the Silicon Valley Bank crisis in March 2023.

So far, market concerns have clearly not eased.

US junk bond yield premiums have already exceeded 450 basis points this week. Given expectations of slowing US corporate profit growth and rising borrowing costs, Goldman Sachs strategists also raised their risk estimates for downgrades of dollar debt from investment grade to junk.

They pointed out that currently, nearly a quarter of US bonds rated BBB- are rated with a negative outlook by at least one of the three major rating agencies.

They stated: "This is the highest level except for the 2008 global financial crisis and the 2020 pandemic impact."