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Stocks spent much of Friday in recovery mode following weakness on global trade concerns as President Trump said he would impose tariffs up to $50 billion on goods from China. According to officials in Washington, China’s theft of intellectual property and technology and other unfair trade practices reignited Trump’s promise to inflict heavy tariffs. Markets opened deep in the red on Monday amid lingering trade tensions between the two largest economies in the world.
The long-term effect of tariffs is nebulous and full of speculation. On the other hand, Treasury bond yields are presenting a compelling case as they rose sharply in recent weeks on stronger-than-expected U.S. economic data. In contrast, corporate bond yields have not risen as fast — so spreads between corporate and Treasury bond yields have narrowed. The spread between AAA-rated corporate bonds and 10-year government bonds in May was 102 basis points, well below the 35-year average of 123 bps. The gap between the government 10-year bond yield and a BAA-rated bond in May was 185 basis points, also below the historical average spread of 233 bps. These spreads help us gauge the bond market’s view of corporate financial strength. Based on this premise, corporate balance sheets look solid, but corporate bonds are not as favorable to investors. From an investment standpoint, we are favoring inflation-protected securities and shorter-duration Treasuries.
