Since our note in early April titled “Tariff Tantrum Throws Credit Correction into High Gear”, credit market volatility has remained elevated. The CDX/CBOE NA High Yield 1-month Volatility Index (VIXHY*) peaked at 459 on April 8th, after starting the month at 213, near the high end of the 12-month range and above the LTM average of 148. The spread of CDX HY peaked intraday at 497 then road a roller coaster through the middle third of the month. Responding to the 90-day tariff delay, certain product exclusions and market hopes for reasonable negotiations leading to manageable deals, volatility has mean reverted and spreads have mostly tightened over the last two weeks with VIXHY and CDXHY settling around 220 and 388 basis points respectively. VIXIG, a sister gauge of investment grade spread volatility peaked in April at 92 while CDXIG widened to 81 basis points. After following a reversion and tightening path similar to high yield, VIXIG sits at 39.5 and CDXIG at 63.5.
In the wake of Liberation Day, high yield and leveraged loan mutual fund and ETF holders voted with their feet, resulting in record outflows from each of $9.8 billion and $6.4 billion respectively. One silver lining during this volatility was that credit market trading was relatively orderly allowing for substantial risk transfer. In fact, US high yield volumes reached a peak of 80% above the YTD daily average and traded above average daily volumes for all of April.
In contrast to much higher secondary volumes, primary activity plunged. As is typical during periods of market duress, IG issuance returned first after a brief hiatus completing $105 billion in deals, a substantial “catch up” to pre-tariff estimates of $120 billion for April. Leveraged loan issuance totaled only $6.2 billion in the month compared to $57 billion in March and most monthly tallies last year reaching over $100 billion. In fact, April 2025 was the slowest loan pricing month in over a decade. High yield issuance totaled only $8.4 billion in the month compared to an average of $22 billion monthly through Q1.
Banks and strategists continued to adjust forecasts for the new trade war environment which has drawn most to assume the US will suffer a “mild recession”. Goldman Sachs raised its issuer-weighted default forecasts for year-end 2025 from 3% to 5% for high yield and from 3.5% to 8% for leveraged loans. For context, an 8% loan default rate would compare closely with the COVID period and only fall 2.5% shy of the GFC peak, according to GS.
Rising actual and expected defaults should drive credit spreads wider and keep credit volatility elevated. JP Morgan forecasts cash high yield spreads will reach 600 basis points by year-end compared to 395 today. For comparison, the post GFC average is 480 basis points, and the US recession average is 971.
On top of wild swings in credit spreads and volatility, we’ve observed unusually high performance dispersion between industries. For example, while the JP Morgan high yield index clawed back to a seemingly placid +0.04% return in April, the Energy, Consumer Products and Retail industries returned -2.79%, -1.92% and -1.55% respectively while Telecom and Services returned +1.60% and 1.01%. Similar dispersion occurred in loans where while the JPM index was down only 7 basis points, Retail, Consumer Products and Chemicals were down 2.18%, 1.93% and 0.92% while Cable/Satellite was up 1.21% and Housing 0.96%.
We’ve observed a sharp uptick in alpha opportunities in the credit markets over the last several weeks, but "this isn’t your uncle’s credit market", as many exploitable opportunities lie outside traditional coupon clipping. Our view is today’s credit markets mostly reward those who don’t only make money from betting on or against stressed and distressed companies, but also exploit capital structure, cross asset and volatility arbitrage opportunities, structure trades that can benefit from spread decompression as well as compression and properly hedge the wider than typical range of outcomes inherent in times such as these that lack economic backdrop clarity. This requires experience positioning not only bonds, loans and claims but the full arsenal of credit derivatives, tranches and customized direct financing solutions.
*The 1-month Credit VIX indices provide an annualized expected volatility number for the underlying CDX index spread change in basis points. Adding and subtracting the VIX reading divided by the square root of 12 to/from the CDX level at the time provides the market’s indication of the spread range over the coming month.