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US investment grade spreads are finally starting to widen from their historic tight levels, after months of credit markets ignoring any and all geopolitical or macro concerns.

The risk off tone is largely explained by the escalation of US-China trade disputes and concerns that more bankruptcies in the vein of First Brands and Tricolor could have a wide reaching impact on credit markets.

Average triple-B spreads moved to 102bps over Treasuries as of Tuesday, which is about 8bps wide of the start of last week, according to ICE BofA data.

Spreads have widened even as investors are turning more conservative, with funds moving out of high yield and into IG credit funds, where positioning is now its highest since January 2022, according to BofA Research, which called this moment a healthy correction.

“None of these concerns change the constructive thesis for IG credit, which depends on low recession risk for fundamentals and a dovish Fed for technicals,” BofA credit strategist Yuri Seliger wrote in a report this week. “At the same time the correction is healthy because spreads got too tight in part due to pricing out almost all risks.”

The US and China are both set to impose strong tariffs next month and would largely target technology and rare earth minerals. President Trump himself described it as a trade war and investors are worried about what the implications will be for chip makers and the booming artificial intelligence space.

The other focus is on how exposure to potential issues in private credit may flow through to IG credits.

Jefferies, UBS and Fifth Third disclosed losses from the bankruptcy of automotive parts maker First Brands while JP Morgan, Fifth Third and Barclays are among those taking losses from the collapse of subprime auto lender Tricolor. JP Morgan CEO Jamie Dimon even added on the bank’s earnings call this week that “when you see one cockroach, there's probably more.”

Those bank disclosures did little to dampen enthusiasm for new bank issuance. Goldman Sachs priced a $10bn five-part deal on 14 October that received ample demand to upsize by $2bn, and JP Morgan priced a two-part $5bn bond package of fixed-to-float notes on 15 October (though the bank did drop a previously planned 6NC5 floater).

Despite exposure to these credit losses, banks are still largely seen as a safe haven from these rising risks.

“Under current market conditions, many investors have decided the large banks — including medium to large banks — are fine, even with direct exposure to FBG/Tricolor,” one bank analyst said. “I am not sure this is the most prudent way for the market to behave but this is a reality for now.”

BDC bash

Despite the strength of banks, the financial sector saw some of the biggest spread moves last week.

The sector was dragged down by public IG-rated BDC’s, which have the most exposure to private credit risk. Check out 9fin’s analysis of BDC exposures to the First Brands collapse here.

For example, Blackstone Secured Lending Fund priced $500m SUNs due 2031 at Treasuries plus 155bps on 6 October, but was seen trading some 12bps wider at around T+167bps this week, according to ICE Vantage data.

Likewise, banks with a greater exposure to the sector have taken a hit as well. Japanese bank Norinchukin is a big CLO buyer and disclosed a $1.75bn exposure to the First Brands bankruptcy last week.

Norinchukin was in the IG market in September with a $1bn two-part bond package. The SUNs due 2030 priced at T+93bps, tightened to as low at T+77bps as recently as last week, and then broke to as wide as T+91bps, according to ICE Vantage data. The company’s 2035s similarly widened out to as much as 110bps over Treasuries from pricing levels of T+108bps.

“I'm not sure that anybody has fully wrapped their arms around the implications from this just yet,” one portfolio manager said. “A lot of people are asking, is there contagion? Are there other funds who have exposure? Who's the next one? Who has exposure?”

Even with the mild spread widening over the last week, fundamentals and technicals in the IG asset class remain very strong and some investors say this bout of volatility is likely to wash over.

“These are all idiosyncratic situations, I don't think there's necessarily something structural wrong,” on buysider said. “I feel pretty strongly that you have not seen a lot of disruption in public markets, which have actually been pretty conservative over the past few years.”