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HomeMarketDebt derivatives are so tight even Trump’s tariff talk can’t shift them

Debt derivatives are so tight even Trump’s tariff talk can’t shift them

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(Bloomberg) — Even US President Donald Trump’s tariff rhetoric can’t rattle credit markets, a sign to some money managers and strategists that the market is too complacent.

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Prices on credit default swaps barely moved on Monday amid the prospect of levies being introduced on Mexican and Canadian goods, even as trading volume in the derivatives more than doubled from the previous week’s daily average. By Tuesday, activity had returned to more typical levels.

CDS didn’t sell off because “credit remains a tight asset class with the most stretched valuations across the board,” said Gabriele Foa, an Algebris Investments portfolio manager whose Global Opportunities Fund has “extremely cautious” positioning at present. “In high yield, CDS has only been at current levels three times in the last 10 years and that’s been followed by a sharp widening in the six to nine months after that.”

Trump is trying to revitalize US industry, cut the government deficit and gain bargaining power with foreign governments through the use of tariffs, with the latest due to be announced this coming week. The speed and breadth of the announcements has surprised markets. JPMorgan Chase & Co. credit strategists in Europe including Matthew Bailey turned bearish at the end of last month, arguing there are growing signs of market complacency, with pricing “extremely difficult to justify” and “feeling completely disconnected from the headlines.”

European analysts at the bank even compiled a ‘Trade War’ basket of CDS linked to European companies most at risk of tariffs, arguing that even though the threat of levies on Mexico and Canada have receded for now, “the risks remain significant” and tight valuations make setting hedges attractive.

Algebris’s Foa sees similar signs of debt investors becoming too comfortable with the emerging risks.

“The market is getting more relaxed with the idea that anything that is going to hurt economic growth won’t happen,” he said, adding that credit is “priced for perfection,” even though “we also do have volatility risk coming up. Credit’s in a tight spot.”

The sanguine reaction also contrasts with the foreign-exchange options market, where trading volumes have jumped to multi-year highs as investors buy downside protection.

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