On the surface, the credit markets appear calm. Yields are high, credit spreads are low, the demand for these bonds is healthy and default rates overall remain relatively low. Under the hood, however, some stress signals are starting to show.
After spiking in April during the height of trade war fear, we’ve seen junk bond spreads, the extra yield investors demand above and beyond the risk-free rate, go back to pre-Liberation Day levels. Outside of that stretch, credit spreads have been unusually tight, suggesting a more optimistic outlook from fixed income investors. Lately though, a mix of sticky inflation, “higher for longer” interest rates and rising refinancing needs may be chipping away at that confidence.
And that could be a good thing for the ATAC Credit Rotation ETF (Ticker: JOJO).
*As Of 7/1/25
The Fed, of course, is at the center of this. They've halted rate cuts in 2025 and have only recently signaled they're going to pick it up again soon. The economy has proven resilient, wage growth is still strong and inflation hasn't fully returned to normal, at least on the core and services sides. Powell's tone has forced markets to reassess the timeline for rate relief (although the street is optimistic it could happen relatively soon). For junk-rated companies and those with weaker balance sheets, that’s not good news.
The biggest issue may be that a big chunk of high yield debt matures over the next two to three years. Most of it was issued back in the days of near-zero interest rates. Now, those same companies may be forced to refinance at much higher rates. That puts a lot of potential stress on balance sheets and could impact the ability of these companies to obtain their necessary levels of financing at all.
What we’re likely seeing now is a modest shift from “risk-on” to something a little more cautious. There's a very slight migration from high yield bond ETFs to more conservative fixed income choices, but nothing that would signify a major shift yet. That could change if there's any additional fallout from the recent Middle East conflict and any potential strains with oil supplies or supply chains. This feels like less of a risk today, but geopolitics seem to be ongoing issue in this environment.
One thing that’s adding complexity is that the U.S. economy is still in a relatively healthy place. Rising junk bond yields can be associated with weaker economic environments, but that’s not what’s happening now. The yield curve shifted north following the Fed’s aggressive rate hiking cycle in order to control inflation. Those typically have the effect of slowing down the economy, but GDP growth is still looking sturdy, the labor market is relatively tight and earnings for most large companies are holding up. That adds some complexity in determining whether credit is really signaling trouble ahead.
If you’re chasing yield in this market, it may be time to take a closer look under the hood. Those juicy 7-8% yields might look tempting, but there's credit risk in there that most investors haven't had to really consider in a while. If credit spreads start widening and defaults tick up, the price direction on junk bonds can quickly turn south. You’re collecting income, but you’re also taking on real price risk.
You may be collecting income, sticking with cash or short-term Treasuries. That means you haven't entirely missed out. Yields have gotten lower, but an essentially risk-free 4% return isn't too bad. Plus, you haven’t had to stretch for returns. Risk/return tradeoffs are always something to consider, not just the yield that's quoted by an ETF.
If you’re considering both junk bonds and Treasuries, but aren’t sure which side of the trade to take, a risk rotation strategy might be worth considering. The ATAC Credit Rotation ETF (JOJO) rotates between these two asset classes based on signals generated by the market. When conditions appear calm, JOJO shifts to a riskier position by moving into junk bonds. When warning signs start flashing, JOJO can pivot back in Treasuries as a more conservative option. These strategies have the goal of managing overall risk while striving to generate superior risk-adjusted returns.
The longer-term consideration might be normalization. After more than a decade of ultra-easy money, we’re in a new environment now. Debt is more expensive, credit quality matters and risk isn’t free. It's playing out right now in the junk bond market, but the shifts have been subtle thus far. We're getting some yellow lights right now, but no clear red lights. Yet.
If you’re an income investor, this may be a moment to be more selective. Geopolitical risks are changing the narrative and credit issues are present below the surface, but volatility could spike pretty quickly in the right conditions. In these types of situations, managing risk through funds, such as JOJO, might be a way to capture capital appreciation potential and risk management at the same time.
Consider JOJO as part of your bond allocation strategy. Not because I developed the strategy and I’m the portfolio manager of the fund. Consider it because there are no gurus, only cycles. And the cycle may finally be here for it.
Michael A. Gayed, CFA
Junk debt, also known as high-yield bonds or speculative-grade debt, refers to fixed-income securities issued by companies or governments with lower credit ratings, offering higher interest rates to compensate investors for the elevated risk of default.
The VIX index, often called the "fear gauge" of Wall Street, is a real-time market index that measures the market's expectation of 30-day forward-looking volatility derived from S&P 500 index options prices, serving as a key barometer of investor sentiment and market risk.
The ICE BofA BB US High Yield Index Option-Adjusted Spread measures the yield differential between BB-rated corporate bonds and a spot Treasury curve, quantifying the risk premium for below-investment-grade debt with a BB rating in the US market.
As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The market price normally should approximate the Fund’s net asset value per share (NAV), but the market price sometimes may be higher or lower than the NAV. The Fund is new with a limited operating history. There are a limited number of financial institutions authorized to buy and sell shares directly with the Fund, and there may be a limited number of other liquidity providers in the marketplace. There is no assurance that Fund shares will trade at any volume, or at all, on any stock exchange. Low trading activity may result in shares trading at a material discount to NAV.
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