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13 March 2025

Trumps’s Tariffs & its implications for bond market

Global investors have been digesting the change in policy direction after President Trump’s return to the White House. In contrast to his first term, actions on the trade front have been a policy priority, and the rules of the game are changing.

Trump has already imposed 25% tariffs on imports from Mexico and Canada, 20% tariffs on Chinese imports, and a 25% tariff on all aluminium and steel imports. He has also directed his administration to draw up plans for reciprocal tariffs equivalent to those imposed by other countries on US goods.

What would be the economic impact for the US of the proposed tariffs?

The implementation of tariffs points towards higher inflation and lower growth for the US economy, and this is what we can outline as an “Aggressive Trump” scenario.

Forecasts for growth and inflation would move in the "stagflationary" direction outlined under the scenario (see graph below), with the US growth outlook weakening accompanied by higher inflation, lower growth and higher inflation outcome for the rest of the world.

Source: Bloomberg

What do tariffs mean for bond investors?

  • Inflation and Interest Rate Dynamics: Tariffs directly increase the cost of imports, leading to inflationary pressures. Businesses dependent on foreign goods, such as automobile and electronics manufacturers, are likely to pass these costs onto consumers. Rising inflation could drive bond yields higher as markets price in potential Federal Reserve rate hikes. However, the Federal Reserve faces a dual challenge—balancing inflation control with the risk of slowing economic growth, which could lead to a more accommodative policy stance.

  • Corporate Bond Market Risks: Industries with extensive global supply chains, such as manufacturing and technology, may face margin pressures, potentially triggering credit rating downgrades and wider corporate bond spreads. High-yield bonds in those sectors could experience increased volatility as financially weaker firms struggle to manage escalating costs.

  • Sovereign Debt and Global Fixed Income Trends: Emerging markets with strong US trade ties, including Mexico and China, may encounter capital outflows, currency depreciation, and higher borrowing costs. Sovereign bond yields in these regions are expected to rise as investors demand higher risk premiums. Meanwhile, European corporate bonds have remained stable, with government bond yields reflecting cautious investors’ sentiment.

  • Market Reactions and Future Outlook: Recent market movements indicate growing uncertainty, prompting investors to seek safe-haven assets. The 10-year US Treasury yield has dropped by approximately 40 basis points since Trump's inauguration as shown by below graphs, reflecting increasing demand for stability. Treasury Secretary Scott Bessent has pledged to lower the 10-year yield, recognizing its influence on borrowing costs. Corporate bond spreads have widened, particularly in the US, whereas European and Asian bond markets have exhibited mixed reactions.


Ultimately, Trump’s tariff policies have reinforced market uncertainty, pushing investors toward fixed income assets while reshaping global interest rate expectations. As the administration continues to adjust its economic strategy, the fixed income market remains a critical area to watch for further developments as the market now views the tariff war, especially with China and other countries, not as an inflationary force but as a serious recession risk.