American carmakers face credit pressure as Trump’s tariffs near

Bond investors are getting a little more concerned about the outlook for automakers that could see their bottom lines hit by US tariffs.

The extra yield that bondholders get for owning investment-grade car bonds instead of Treasuries has widened about 0.2 percentage point since the end of January.

Automakers’ bonds, like debt in general, are seeing their prices rise, but they’re lagging the broader universe of high-grade bonds, where spreads have widened just 0.08 percentage point, according to Bloomberg index data.

On Tuesday, a pair of bonds due this year from General Motors Co. subsidiary GM Financial widened by more than 10 basis points each in secondary trading, according to Trace data. That comes after the car maker sold fresh debt in the US last week with spreads, or risk premiums, about 0.1 percentage point more than if there weren’t tariff risk, according to Todd Duvick, an analyst covering auto bonds at research firm CreditSights.

When Paccar Inc., a maker of commercial trucks, sold bonds in February, it paid about 0.1 percentage point more than its existing bonds, a concession that reflected tariff risk, Duvick said. That’s a surprising twist for a company with a relatively healthy balance sheet that would normally not pay anything extra, he said.

Earlier last month, GM Financial was hit in the Canadian corporate debt market too. The company had to boost spreads on a bond it was selling to bring yields above its existing notes. That’s a rarity in the Canadian dollar market now, where investors’ strong demand has pushed yields on new bonds to lower levels than existing securities.

US President Donald Trump has confirmed 25% tariffs on most Canadian goods imported to the US starting on Tuesday, and he has promised 25% tariffs on automobiles by as soon as April. Canada is preparing to retaliate with counter tariffs. A trade war could reduce Canadian output by 2.5% in two years and wipe out growth, according to the Bank of Canada. Stellantis NV, the maker of Chrysler cars, has already paused work at its assembly plant in Ontario, which employs about 3,000 workers.

Automakers would be among the hardest-hit companies, given how freely goods currently travel across US, Canadian and Mexican borders during manufacturing. Car manufacturers may have to absorb rather than pass along some of the costs, CreditSights’s Duvick said.

Automaking is a competitive industry. Tariffs could boost US car prices by as much as $12,000, according to a study by automotive consulting firm Anderson Economic Group. Consumers can only absorb so much of the added cost burden: The price of new cars and trucks has risen more than 20% since 2019.

“If we have material tariff concerns, in the credit markets Canadian autos are where you are going to see that concern expressed first,” said Adrienne Young, director of Canadian corporate credit research for Franklin Templeton Fixed Income.

The trade wars that are gearing up now could have a global impact on credit markets. Some European businesses in threatened industries have been accelerating borrowing plans to get ahead of any punitive measures.

US bonds from carmakers could also broadly get hit. Manuel Hayes, a senior portfolio manager at Insight Investment, is watching to see if at least some automakers have their bonds cut to junk status. If there are such downgrades and many money managers are forced to sell their holdings, he’ll consider buying the so-called “fallen angels.” When the companies are ultimately upgraded back to high-grade, bond prices may surge.

“At the end of the day, these are still very large corporations, they’re very important to the US economy,” he said. “It’s just that there’s some short-term volatility on the horizon.”

Historic tightness

Despite the turmoil tariffs could unleash, credit spreads are generally tight in Canada and the US.

“What we haven’t seen, in our view, is reflection of the recession and the potential implication of a trade war in these credit prices,” said Richard Pilosof, chief executive officer of Toronto-based asset manager RP Investment Advisors.

In Canada, that overall strength is supported by strong demand and limited supply.

On the demand side, the Bank of Canada’s cuts to overnight interest rates are pushing money into longer-term securities and out of shorter-term instruments, driving demand for corporate bonds, Pilosof said.

Tariff threats will likely hasten the pace of rate cuts, bolstering flows into fixed income, said Benjamin Jang, a portfolio manager at Vancouver-based asset management firm Nicola Wealth Management Ltd.

On the supply side, global issuers are favoring cheaper US and European markets over Canada, and even Canadian banks have leaned toward US-dollar issuances for bail-in bonds, Jang said.

Beyond supply and demand fundamentals, Canadian credit spreads are often less sensitive to market signals, Pilosof said. Retail investors in Canada tend to hold bonds to maturity. “They’re not looking at any change in the composition of the economy or industry,” he said.

In the US, supply has similarly been relatively light. Net sales of investment-grade corporate bonds are down more than 20% for 2025 through Tuesday, compared with the same period last year, according to data compiled by Bloomberg.

— By Chunzi Xu and Ethan M Steinberg (Bloomberg)