Junk Bonds Are Signaling the Same Optimism About the U.S. Economy as Stocks

The U.S. junk bond market is offering a surprisingly upbeat signal about the economy, even amid growing concerns over tariffs and broader market volatility. According to Nicholas Colas, co-founder of DataTrek Research, the high-yield bond market currently reflects the same confidence seen in the stock market, indicating that investors are not anticipating a recession any time soon.

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High-yield bonds, often referred to as junk bonds, carry more risk than government debt and typically pay higher yields to compensate for that risk. These bonds tend to be sensitive to economic downturns, as struggling companies are more likely to default during such periods. Yet despite rising geopolitical tensions, including the impact of tariffs introduced by President Donald Trump, junk bond spreads remain tight, showing little indication of growing anxiety.

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Colas noted that current spreads—the extra yield investors demand to hold high-yield bonds over comparable U.S. Treasurys—have dropped to approximately 2.88 percentage points. That’s lower than at any time in 2021, a period marked by strong confidence in the economy, thanks to aggressive pandemic-era stimulus efforts.

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The only time spreads were lower recently was in January of this year. These historically narrow spreads suggest bond investors, who are generally more risk-averse than equity traders, are feeling confident about the economy’s outlook.

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This sentiment aligns with trends in the stock market. The S&P 500, a key benchmark for large-cap U.S. stocks, has repeatedly hit record highs in 2025. As of July 3, it had notched its seventh all-time closing high of the year. Although it dipped slightly the next trading day—falling 0.9% below that peak—it remains near historical highs, signaling ongoing investor optimism.

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Michael Chang, who oversees high-yield credit at Vanguard, said in a recent interview that tariffs, while notable, are not likely to derail the U.S. economy. “Our view is that where tariffs are ending up won’t be the trigger for a recession here in the U.S.,” he explained. Chang believes a significant widening of spreads—indicating fear of recession—is unlikely unless the economic picture drastically changes.

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So far, 2025 has been favorable for junk bonds. The iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG), which tracks a broad index of junk bonds, returned 5% during the first half of the year, according to FactSet. The SPDR Bloomberg High Yield Bond ETF (JNK) wasn’t far behind, delivering a 4.8% return. In particular, June was a standout month. The JNK ETF gained 2% that month alone, its strongest showing since July 2024.

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However, July has seen some softening as investors grow cautious over the latest developments in tariff policy. On Monday, Trump posted letters on social media outlining new tariff rules that will take effect on August 1, adding to market uncertainty.

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In response to potential fallout from the trade tensions, Chang said he prefers to allocate capital to more defensive areas of the high-yield market—sectors that are less likely to be disrupted by international trade, such as healthcare, utilities, and food and beverage companies. These areas offer more domestic stability, which can help shield portfolios from global shocks.

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Still, Chang acknowledges that valuations in corporate credit markets are “pretty stretched.” With spreads already narrow and bond prices high, the room for further upside could be limited unless economic data continues to surprise on the upside. Nonetheless, he sees no immediate sign of trouble. “The skies are cloudy, but they’re not stormy,” he said, summarizing his view that while growth may slow due to tariffs, a full-blown recession is unlikely—conditions that are generally favorable for the high-yield sector.

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Currently, the average yield across the U.S. junk bond market hovers around 7%. While this figure will fluctuate with changes in spreads, it remains attractive to investors seeking returns in a low-yield environment. Moreover, the composition of the junk bond market has improved since before the 2008 financial crisis, with many issuers now representing stronger balance sheets and better credit quality.

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That said, Chang is watching closely for signs of strain in other areas of risky credit, including leveraged loans. He also expressed caution regarding the retail sector, which could be hit hard by new tariffs due to its exposure to imported goods. “It would not surprise me to get more day-to-day volatility” in the near future as markets digest incoming news on tariffs, he noted.

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On Tuesday, the junk bond market edged down slightly, with broader equity markets also showing modest declines. The Dow Jones Industrial Average dropped 0.4%, the S&P 500 slipped 0.1%, and the Nasdaq Composite ended nearly flat, gaining less than 0.1%.

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In all, despite geopolitical uncertainties and tariff noise, the U.S. high-yield bond market continues to reflect confidence in the economic outlook, suggesting that investors remain firmly in the “soft landing” camp.

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