The state of play in fixed income after April turmoil

April was one of the most volatile months across financial markets in recent memory, triggered by President Trump’s sweeping tariff announcement on April 2. While much has been written about the geopolitical and economic implications, here we will focus on how equity, credit and rates markets have adjusted following what was a sharp sell-off and subsequent recovery.

Despite a 12% drop in the S&P 500 stock index in four days, equity markets broadly recovered into month-end, aided by the 90-day pause on tariffs for all but China that was announced on April 9. The S&P 500 fell over 11% at its trough early in the month, but ended April down just 0.7%. The Nasdaq index followed a similar path, closing the month marginally higher as demand for tech names returned. European indices were more resilient, with Germany’s DAX ending the month higher, while the Chinese stock market (CSI 300) remained under pressure amid tariffs of 145%. Importantly, the recovery reflects market optimism around potential trade resolutions, particularly between the US and China, and an ongoing belief that the global growth outlook, while less certain, remains largely intact.

The risk-off sentiment was reflected in credit spreads, which widened sharply in early April before retracing as the tariff rhetoric softened. By month-end, US investment grade spreads were just 12bp wider, with similar moves of 17bp observed in the UK and Europe. High yield bond markets saw more pronounced moves, reflecting their higher sensitivity to global growth expectations, especially for lower-rated or cyclically exposed names.

Sector dispersion was notable, with tariff-exposed industries such as autos widening meaningfully, while more defensive sectors such as utilities and telecoms saw less pronounced widening and, in some cases, closed tighter on the month.

The market’s initial risk-off reaction triggered a significant rally in government bonds, with the 10-year US Treasury (UST) yield falling 30bp in the days following the initial tariff announcement. This rally quickly reversed, driven by what was believed to be hedge fund basis trade unwinding. Subsequently, the 30-year UST yield peaked above 5%, with the 10-year yield reaching a high just under 4.6%. This apparent lack of conviction in USTs as a global risk-free asset likely prompted Trump's 90-day pause, with Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick reportedly steering him to backtrack given the market's adverse reaction. While hedge fund selling was likely the primary driver for the rise in UST yields, we also believe a broader shift away from dollar assets and an increasing term premium reflecting heightened US policy uncertainty under the current administration were contributing factors. Furthermore, the market appears to lack faith in the government's ability to reduce the deficit through Elon Musk-led efficiency measures and tariff revenues.

Over the month, both Bunds and Gilts significantly outperformed Treasuries by 26bp and 20bp respectively. The outperformance has been attributed to a rotation out of USTs into Bunds, for greater risk-off protection amid the unpredictable US administration and the constant flip-flopping on tariffs. Another key factor is that tariffs are expected to act more as a drag on growth than a source of inflation in Europe, giving the European Central Bank (ECB) and Bank of England greater flexibility to ease policy if needed.

Fund flows

According to data from Santander, after three consecutive weeks of outflows from credit, investor sentiment turned more constructive with both European and US funds recording net inflows in the week ended May 2. European credit funds saw a net inflow of $770m, partially reversing the $3.5bn of outflows over the prior three weeks. In the US, the rebound was more pronounced, with inflows totalling $3.6bn versus cumulative outflows of $20bn over the previous three-week period.

Within asset classes, European investment grade funds were the primary beneficiaries, attracting $554m, more than double the $216m that flowed into European high yield. In the US, the pattern diverged, with high yield funds accounting for the entirety of the inflows ($3.6bn), while US investment grade funds saw a marginal outflow of $79m.

In equity markets, European equity funds continued to draw investor interest, posting a third consecutive week of inflows amounting to $4.5bn. By contrast, US equity funds saw substantial redemptions of $11bn, marking the largest weekly outflow in five weeks and highlighting the growing divergence in equity sentiment between the US and Europe.

Primary bond markets

Primary markets were largely closed in the days following April 2, however they rebounded significantly once tariff escalation fears eased. In the US, $41.6bn was priced across 33 investment grade transactions in the final week of April, with strong execution metrics according to data from Goldman Sachs. Order books were on average 4.2x oversubscribed (vs. 3.6x year-to-date), the average spread tightening from initial price thoughts was 28.5bp (vs. 25.3bp YTD), and new issue concessions averaged 3.4bp (vs. 4.4bp YTD).

In Europe, it was a similar story with €28.4bn in new supply across corporates and financials met by over €70bn of demand last week. Average book coverage stood at 3.0x, with new issue premiums at 3bp on average  and exceeding 10bp in only three transactions. Notably, large multinational issuers dominated supply; Alphabet printed a €6.75bn five-tranche debut, the largest euro deal since February 2020, while Visa and Fiserv followed with multi-tranche prints driven by more favourable market conditions in Europe.

Liquidity

During periods of heightened volatility, credit market liquidity deteriorated and bid-offer spreads widened, as would be expected. In higher beta Additional Tier 1s (AT1s), bid-offer spreads briefly reached around 1pt, though most traded closer to 50 cents. In the higher quality senior corporate space, bid-offer spreads widened toward the upper end of the 5–10bp range, with more pronounced moves in tariff-exposed sectors such as autos and industrials. Despite this, liquidity proved surprisingly resilient. Even at peak stress levels, market functioning remained intact, and overall, conditions held up well compared to past episodes of volatility. Bid-offer levels have since returned to their normal range and liquidity remains healthy.

Fixed income resilient through turmoil

While April ended with markets largely balanced, the underlying drivers of volatility – trade policy uncertainty, slowing US growth, heightened geopolitical risk, fiscal deficits – remain largely unresolved. The so-called “Trump put” appears to have placed a floor under equities near 5,000 on the S&P 500 and a ceiling of 5% on the US 30-year yield, meanwhile the impact and uncertainty stemming from tariffs is yet to be felt in economic data. Ultimately, unless there is a significant rollback on tariffs, the impacts on US growth will be meaningful. Tariffs of 50-65% on China and 10% tariffs on most of the rest of world are still a substantial negative growth shock coming into an already decelerating US growth picture.

For credit investors, in our view it remains prudent to be selective despite slightly wider spreads and an encouragingly healthy primary market. We continue to favour sectors with limited tariff exposure and resilient fundamentals. We see banks, telecoms, and utilities as relatively well-positioned, while caution is warranted in cyclicals, lower-rated energy names and export-heavy industrials.

Despite ongoing uncertainty, we would argue credit generally remains attractive thanks to its strong technical – attractive yields, strong breakevens and elevated carry. April’s market resilience came in the face of significant monthly outflows, but ample cash balances likely cushioned the impact on spreads, which widened only modestly. As Q2 progresses, attention will shift to the trajectory of trade negotiations and incoming economic data, especially around growth, inflation, and labour markets. While volatility is set to persist amid policy noise, trade tensions, and fiscal concerns, we think fixed income remains attractive in this uncertain environment.