The recent escalation of U.S.-China trade tensions is threatening to cut short a nascent recovery in the market for collateralized loan obligations, a critical piece of the machinery that provides funds to businesses with low credit ratings.

Slow to rebound after a challenging end to 2018, prices on securities backed by pools of junk-rated corporate loans, known as CLO debt, had begun to gather some momentum toward the end of April. But they have stalled as the U.S. and China imposed new tariffs on each other’s goods, sparking...