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Credit market's riskiest borrowers send worrying signals

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Credit spreads retrenched after tariff-induced spike

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Trade policy is key in determining outlook

By Davide Barbuscia

BEVERLY HILLS, California, May 6 (Reuters) - Pockets of

the U.S. corporate debt market are flashing warning signs that a

cooling economy is squeezing the most fragile borrowers, a

BlackRock ( BLK ) executive said, despite broader market hopes that the

turbulence from tariffs has subsided.

Credit spreads - the premium investors demand to hold

corporate debt rather than safer U.S. government bonds - spiked

last month after President Donald Trump announced tariffs that

sparked market volatility and fears of a sharp economic

slowdown. But spreads have tightened in recent weeks, as the

U.S. administration signaled a softer stance on tariffs and

raised the possibility of imminent trade deals.

Still, some signs of the financial health of CCC-rated

companies - the market's riskiest borrowers - have deteriorated

to the point that their earnings are not high enough to allow

them to service their debt, said Amanda Lynam, head of macro

credit research within the Portfolio Management Group at

BlackRock ( BLK ), the world's largest asset management firm.

"There are pockets that we are watching very carefully," she

told Reuters in an interview. "There are companies that have

less of a financial cushion, and you have to tread more

carefully, because if and when we see a downshift in economic

activity, they could be more vulnerable."

Lynam spoke to Reuters late on Monday on the sidelines of

the Milken Institute Global Conference taking place this week in

Beverly Hills, where Wall Street executives and company chiefs

struck a better-than-feared tone on the U.S. economic outlook.

High-yield credit spreads widened to 461 basis points last

month after Trump's imposition of steep tariffs - their widest

since early 2023, when turmoil in the regional banking sector

rocked U.S. markets. They have since retreated and were last at

360 basis points, according to the ICE BofA US High Yield Index

.

The retreat was partly due to renewed market optimism on the

U.S. economy and its ability to withstand policy uncertainty,

said Lynam. Also, several investors had long been waiting for

corporate debt valuations to drop as an opportunity to add

exposure more cheaply, she said.

"There's a lot of money on the sidelines and a lot of

investors share, I think, a common view that fundamentals are

pretty good, and want to wait for a decent entry point. When you

have those periods of widening, (spreads) snap back quickly

because that money is getting deployed," she said.

Still, valuations in credit markets could be impacted by a

"more challenging growth and inflation backdrop," she said, with

Trump's trade policies seen as key in determining the economic

outlook. "What this all boils down to is growth," said Lynam.

Separately, Purnima Puri, a governing partner at HPS

Investment Partners, a credit investment firm, said on Tuesday

the recent retrenchment in credit spreads was unlikely to last.

BlackRock ( BLK ) announced late last year that it planned to buy

HPS for about $12 billion.

"When we're looking at the market and tariffs and trade and

inflation and then growth ... we don't think that the spread

retrenchment is sustainable," she said on stage at the Milken

event on Tuesday.