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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. 

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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.

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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.

CDS has benefited in recent weeks from the fact that the emergence of DeepSeek isn’t seen as much of a debt story, said one derivatives trader, who asked not to be identified. The threat from tariffs will have a more muted impact on credit because the asset class hasn’t seen the type of gains seen in the equity markets, so a hiccup won’t matter too much, the trader said. 

Trump’s policies geared toward promoting growth and helping businesses may end up having a more material impact on credit, said Chris Wright, president and head of private debt at Crescent Capital Group, on the Bloomberg Intelligence Credit Edge podcast. 

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But even so, there is ample ambiguity now about what the future holds. With bouts of market turmoil expected to continue, many debt investors are focusing on interest income, or carry, this year rather than betting on further tightening of spreads above government bonds. That might ultimately result in bigger price moves down the line. 

“Credit is negatively asymmetric at the moment,” Foa said. “You can pocket carry of 3% to 4% but if there’s an accident you can easily lose 10% to 12%.”

Week In Review

• Investment-grade bond markets in both the US and Europe ground to halt on Monday as President Donald Trump’s plans for tariffs riled markets and dented credit sentiment. Borrowers were back with deals on Tuesday and Wednesday. Credit investors now face a choice: Sell bonds in exposed companies and avoid further losses or bet that the businesses are strong enough to weather it.
• A group of Morgan Stanley-led banks sold $5.5 billion of debt tied to Elon Musk’s social-media platform X after receiving stronger-than-expected demand from investors.
• Apollo Global Management Inc. is seeking to build a marketplace that would allow investors to buy and sell high-grade private assets more easily.
• Private equity firms are finding more ways to keep a tighter grip on portfolio companies in financial distress, like adding new provisions to debt documents to curb creditor voting rights, and pushing back against cooperation agreements between lenders.
• After trying to sell debt to finance Lakeview Farms’ acquisition of Noosa Yoghurt, a group of banks led by Citigroup Inc. are turning to private credit firms to drum up demand.
• Rogers Communications Inc. is sounding out investors for junk bond sales in Canadian and US dollars that may reach about C$4 billion ($2.8 billion).
• Insurance companies are snapping up asset-backed bonds to fund future payouts on their annuity products which are seeing record demand — a trend that is expected to continue, according to Morgan Stanley.
• The biggest buyers of leveraged loans are welcoming the return of borrowers to the traditional loan market, but they aren’t embracing every aspect of private credit refinancing deals.
• Norinchukin Bank boosted investments in riskier leveraged loans and sought additional capital after wrong-way bets on low-yielding foreign bonds led to wider losses.
• New York-based hedge fund Fir Tree Partners — known for instigating activist campaigns against distressed companies — is returning outside capital to investors.
• Oaktree Capital Management LP, the investment firm led by Howard Marks that made its name lending to troubled companies, is in talks to replace a group led by Nomura Holdings Inc. as the main lender to B. Riley Financial Inc.
• Liberated Brands, which until recently operated Quiksilver, Billabong and Volcom, has filed bankruptcy, as has discount retailer Essex Technology Group, which does business as Bargain Hunt, while Nikola Corp. is exploring a possible bankruptcy filing.

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On the Move

• Ares Management Corp. has elevated Kipp deVeer and Blair Jacobson to the newly created roles of co-presidents, cementing credit as a crucial cog in the firm’s growth strategy. The pair, who will continue to be based in New York and London respectively, will work closely with Chief Executive Officer Michael Arougheti. Kort Schnabel will replace deVeer as chief executive officer of Ares Capital Corp., a publicly-traded investment vehicle focused on direct lending with nearly $26 billion in assets. Jim Miller will continue as sole president of the fund.
• Macquarie Group Ltd. is shuttering its US debt capital markets arm, a business that includes leveraged loan origination, syndication and trading, to focus resources on private credit. The decision is set to impact roughly 80 staff within the firm’s investment banking arm, known as Macquarie Capital.
• Barclays Plc added four bankers to its desk structuring significant risk transfers in recent months, including Krutheeka Rajkumar in New York, who joins as assistant vice president from Bank of Montreal’s risk and capital solutions desk. In London, Sarah Rainey and Akbar Farid, who are vice presidents, and Rehan Akhtar, an assistant vice president, were recruited from other parts of the firm.
• Citadel hired Morad Masjedi, a former portfolio manager at Brevan Howard Asset Management, to focus on mortgage-backed securities as the hedge fund continues its push into fixed income. He started on Jan. 27 as a portfolio manager and will be building out a team.
• Credit firm D2 Asset Management recruited former Freddie Mac Chief Executive Officer David Brickman to spearhead residential real estate investments, a sector the firm expects to benefit from structural tailwinds like a nationwide housing shortage.
• Swedbank has named Erik Odhnoff as head of group credit. Odhnoff is currently deputy chief credit officer and will take on his new position on Aug. 1, replacing Lars-Erik Danielsson.
• BNP Paribas SA recruited Peter Medynski for a newly-created role as director, loan capital markets, based in Sydney. He was previously with Credit Agricole SA for close to six years in a similar role.

—With assistance from Tasos Vossos.

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