Fixed Income Markets Take Trump’s Tariffs in Stride

Key takeaways:

While uncertainty in the aftermath of the tariff announcement will inevitably create near-term volatility, we believe investors should avoid trying to time the markets. We also believe there is a high likelihood that tariffs ultimately settle meaningfully below the numbers that were presented on April 2.
Amid the pullback in equity markets, an allocation to high-quality fixed income has performed as investors might hope. This reinforces our view that it is for periods such as this that one owns high-quality, diversified fixed income – to serve as a ballast during bouts of equity market volatility.
In our view, a well-diversified portfolio with an appropriate allocation to high-quality, diversified fixed income is critical to navigating the current uncertain environment.

Global financial markets are reeling after the Trump administration announced sweeping reciprocal tariffs on 180 nations and trading partners. Fears of a slowdown in global growth, a hit to corporate profitability, and a slowdown in consumer spending have investors adjusting their expectations for the future. Equity and credit markets are recalibrating to account for the higher risk, while global bond yields are rallying.

As nations, businesses, investors, and markets digest the tariff announcement and its implications, we highlight five key points for investors as they consider how to navigate the current environment.

1. Despite the sticker shock of the announced tariffs – which came in higher than markets were anticipating – we believe the numbers represent an “opening bid” that establishes an anchor for negotiations as the Trump administration seeks to reorient the dynamics of global trade.

While it is our view that tariffs are not a net positive for global growth, we believe the tariff announcement represents the beginning, not the end, of the negotiating process. As a result, we think there is a high likelihood that tariffs ultimately settle meaningfully below the numbers that were presented on April 2.

Investors should keep in mind that a lot can – and almost certainly will – change in the weeks and months to come.

2. Due to uncertainty regarding the path and eventual outcome of global trade negotiations, markets for risk assets are likely to remain choppy in the near term.

We suggest investors avoid trying to time the markets as it is not unusual to experience both large rallies and pullbacks during bouts of volatility. Rather, we believe investors should rely on a time-tested approach of remaining invested and staying diversified. This is also a good time for investors to review their strategic asset allocation to ensure they are invested in portfolios they would be comfortable holding through all market cycles.

3. With the federal funds rate still around 4.25%-4.50%, the Federal Reserve (Fed) remains well positioned to provide relief to the U.S. economy by way of easier monetary policy if labor markets weaken. Notably, we believe the Fed would prioritize its full employment mandate (by cutting rates more aggressively) if it faces a scenario of higher unemployment coupled with higher prices. In our view, fixed income investors are on the right side of the Fed in the present environment.

4. While uncertainty and the resulting volatility may be unwelcome to most investors, it may provide opportunities for active managersto seek improved risk-adjusted returns. Indiscriminate selling may create attractive relative value opportunities for active managers with a long-term view.

5. Amid the pullback in equity markets following the tariff announcement, an allocation to high-quality fixed income has performed as investors might hope.

In our view, it is for periods such as this that one owns high-quality, diversified fixed income – to serve as a ballast during bouts of equity market volatility. As shown in Exhibit 1, major fixed income indices have registered generally positive returns following the tariff announcement.

Summary

Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Definitions

Correlation measures the degree to which two variables move in relation to each other. A value of 1.0 implies movement in parallel, -1.0 implies movement in opposite directions, and 0.0 implies no relationship.

Credit Spread is the difference in yield between securities with similar maturity but different credit quality. Widening spreads generally indicate deteriorating creditworthiness of corporate borrowers, and narrowing indicate improving.

Volatility measures risk using the dispersion of returns for a given investment.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

Fixed Income Markets Take Trump’s Tariffs in Stride

Key takeaways:

Summary

Definitions

Sponsored Content

Trending Topics View All

Upcoming Webinars View All