Ares Global Credit Monitor: Global Tariff Shock Rattles Markets, Credit Remains Resilient

What's New

According to Ares Global Credit Monitor's Q1 2025 report, President Trump's April 2 "Liberation Day" announcement of sweeping "reciprocal tariffs" has significantly increased global recession probability, though credit markets have shown greater resilience than equities. Markets are now digesting Trump's April 9 follow-up announcement of a 90-day pause on most tariffs and reduction to 10% rates (with China excepted).

Why It Matters

This unexpected trade policy shift creates a multi-layered market challenge - higher inflation expectations, supply chain disruptions, and renewed economic uncertainty - all while companies already face elevated interest rate environments. The market's response signals deep concerns about global economic stability despite relatively robust fundamentals.

Big Picture Drivers

Uncertainty has spiked to 25-year highs in trade and economic policy indices, driving equity volatility while credit markets remain relatively stable.
Inflation expectations have surged above 3% for the next two years following tariff announcements, though long-term expectations remain anchored around 2%.
Impact estimates suggest tariffs could reduce growth by 1%, increase inflation by 1-1.5%, and raise unemployment by 0.5%.
Dispersion is increasing across credit markets, with spread widening most pronounced in lower-quality segments.
Opportunity is emerging for private credit providers as public market volatility creates pricing advantages and less competition.

By The Numbers

25%+: Effective average tariff rate after April 2 announcements, higher than bearish forecasts of 16-20%
30%: Economist-estimated US recession probability, up from 20% in March
Z-scores of 2.0-7.6: Statistical significance of two-day credit spread moves after tariff news
6% of high yield market trading at distressed levels (vs. 15-20% in past crises)
153 bps: Spread widening in US High Yield Master II index since December 31, 2024

Key Trends to Watch

Market digestion of the temporary 90-day tariff pause will reveal whether investors view these policies as temporary or permanent economic shocks.
Industry-specific stress will emerge as companies in sectors most exposed to tariffs (like automotive and chemicals) face revenue challenges and potential defaults.
Private credit opportunities may expand as banks reduce lending activity amid uncertainty, creating space for alternative capital providers.
European defense spending could offset some tariff impacts as the EU seeks greater self-sufficiency in response to global trade disruptions.

The Wrap

The tariff shock represents a critical inflection point for global markets that will create both significant risks and selective opportunities. Credit markets, while not immune to volatility, appear better positioned than equities to weather this storm - particularly for investors who can identify companies with robust fundamentals and sufficient free cash flow to service debt obligations despite the changing landscape.