April 2025
Fixed Income Monthly Report
Chris Edmonds
President, Fixed Income & Data Services
ICE
CDS markets show China has most to lose in trade battle with U.S.
Although we are barely halfway through it (at the time of writing), April 2025 seems assured to join March 2020, September 2008 and October 1987 in the rogue’s gallery of the most infamous months in U.S. financial market history.
In just four trading sessions between April 3-8, the S&P 500 fell by more than 12%, only to rally 9.5% on April 9 - the eighth-largest daily percentage gain in the history of the index. The gyrations have been similarly ferocious in equity markets around the world, but little has been written about some of the truly remarkable moves taking place in credit default swaps (CDS).
As a reminder, CDS is a credit derivative that provides a buyer financial protection in the event that a specific reference entity defaults on its debt obligations. If a fixed income desk invests in $100 million of German government bonds and buys a CDS contract of the same value referencing German sovereign debt, should the German government defaults during the five-year term of the contract, the desk will receive a $100 million payout from the counterparty that sold it the swap.
As global trade tensions reached fever pitch earlier this month, many market commentators pronounced that it would be the United States that is most adversely impacted from the imposition of reciprocal tariffs with many of its biggest trading partners. Several went on to conclude that the ultimate beneficiary of any resultant trade war would be China, with the world’s second-largest economy strongly positioned to seize center stage in a globalized economy that is being vacated by a newly-protectionist U.S.1 2 3
That’s not the story that the CDS market is telling, however. ICE decided to dig into sovereign CDS spreads for China, France, Germany, Japan and the U.S. going back to mid-October 2024 to see how the price of buying credit protection on these five nations changed through the U.S. presidential election up to the present.
What we saw in the data was startling.
Figure 1. China credit spreads blow out as market weighs impact of $439bn in lost U.S. exports on nation’s economy and creditworthiness.
Source: ICE Fixed Income & Data Services
Despite the handwringing about the potential damage reciprocal tariffs would wreak on the American economy, the cost of CDS protection on U.S. Treasurys has reacted with relative impassivity to the present volatility. CDS spreads have climbed from 33bps on February 19 (coinciding with all-time highs in U.S. equities) to reach 51bps as of April 10 - a 54% increase in the cost of U.S. credit protection in the space of seven weeks.
This is a meaningful widening of spreads, but they’re not much wider than they were in October 2024 in the run-up to the U.S. presidential election. This indicates that credit markets are not pricing in a material adverse impact on U.S. creditworthiness from the tariff battle at this stage.
Contrast that relative indifference to the colossal move in spreads on CDS referencing Chinese sovereign debt over the past two weeks. On March 25, credit spreads on China were just 47bps, significantly lower than the mid-60s range they were transacting in through late 2024, and the mid-50s range of early 2025.
Just 10 trading sessions later, however, CDS spreads had blown out to 86bps, a staggering 83% increase in the cost of credit protection as the U.S. and China levied an escalating sequence of retaliatory tariffs against each other.
To put the singularly Chinese nature of this move in context, Figure 1 also shows how CDS spreads have moved on other major advanced sovereign debt issuers over the same period. Spreads for protection on Germany and Japan have scarcely moved, while CDS on French OATs is only mildly elevated.
This data tells us that bond markets are pricing in expectations for much greater economic fallout from the ongoing trade tensions for China than for the U.S. A quick look at the balance of trade between the nations shows why. In 2024, the U.S. imported roughly $439 billion of goods and services from China, while exporting $143 billion across the Pacific, a trade imbalance in China’s favor of approximately $295 billion.4
Given the relative size of their respective economies, $143 billion in lost Chinese exports is proportionally less significant to the $27.7 trillion U.S. economy5 (0.5% of GDP) than $439 billion in lost U.S. exports is to the $17.8 trillion Chinese economy (2.5% of GDP).6
Clearly the current trade tensions are far from over, and events will almost certainly have moved on by the time you read this. But one observation that should remain valid in the weeks and months ahead is that - in the eyes of credit markets at least - it is China who has the most to lose in a protracted trade war with the United States.
Financial markets trade publication Risk.net has also been utilizing ICE Clear Credit data to track the impact of global trade tensions in CDS markets. In a paywalled story published on April 14, Risk.net reported that since the U.S. reciprocal tariffs were announced on April 2, trading volume in single-name CDS contracts has slumped while index CDS volumes have nearly doubled. The article attributes the shift to investor “preference for buying across-the-board protection rather than cover for a single issuer,” which may “reflect investors’ expectations that the tariffs will leave few corners of the credit markets untouched.”
Regulatory Corner
Recent regulatory updates in the financial markets.
- The European Securities and Markets Authority (ESMA) has issued updates to the Markets in Financial Instruments Directive II (MiFID II), including a Final Report on systematic internaliser (SI) notifications, volume caps, transparency calculations and circuit breakers. ESMA also published another Final Report covering technical standards regarding order execution policies. Earlier in April, the Authority published Consultation Package 4, which introduced new transparency requirements for derivatives.
- Australian clients are tracking the Australian Prudential Regulatory Authority’s Reporting Standards SRS 551.0 covering liquidity requirements for certain registered superfunds. With the rule finalized in December 2024, initial reporting is due before the end of this year.
- Paul Atkins, commissioner at the U.S. Securities and Exchange Commission (SEC) from 2002 to 2008, was confirmed by the United States Senate to be the next SEC chair on April 9.
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ICE Mortgage Monitor: Home prices cool
An early look at March ICE Home Price Index (HPI) shows that condo prices fell year over year for the first time in more than a decade, with annual home price growth decelerating to 2.2%. The newly enhanced ICE HPI provides an early look at same-month home price trends and a mid-month update, delivering insights more frequently and weeks ahead of other industry benchmarks.
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