The trade war continues its course with the entry into force of Trump’s 20% tariffs on the EU and 125% on China, with red coloring the Asian and European stock markets. No one escapes the sharp declines driven by the imposition of tariffs and the uncertainty surrounding the reaction of the affected countries and their negotiating capacity. Fixed income assets are also suffering the impact of tariffs and the overall context of volatility.
“Currently, markets are fearful and operating accordingly. Even after the impact of the tariff announcement last week, we have seen very diverse headlines and even a temporary risk rally triggered by a televised interview with some unfortunate statements. Progress in trade agreements with Japan and South Korea seems promising, but negotiations with China and the European Union will be more decisive for both market volatility and global economic growth,” says Aaron Rock, Head of Nominal Rates at Aberdeen Investments.
According to Marco Giordano, Chief Investment Officer at Wellington Management, fixed income markets rose amid a widespread risk-off movement. “Yields fell in major economies, led by Australia, along with Japan, New Zealand, and China. European yields followed the same path, with markets pricing in a 90% probability that the ECB will cut interest rates at its next meeting on April 17. U.S. Treasury yields fell across the curve, with the front end leading the move. In credit markets, the Credit Default Swap Index (CDX) for U.S. high yield bonds widened by 20 basis points following the announcement, 10 points more than its euro counterpart, indicating greater risk aversion in U.S. markets,” notes Giordano.
In fact, the yields on 10-year U.S. Treasury bonds rose to 4.47% before stabilizing at 4.33%, indicating a massive sell-off in the bond market. “Bond markets have shown notable fluctuations over the last two trading sessions. Government bond yields are experiencing new volatility, and credit spreads are finally showing a real impact from macroeconomic and stock market pressures,” explains Dario Messi, Head of Fixed Income Analysis at Julius Baer.
According to Rock, yield curves may continue to steepen. “Concerns about growth and pressure for central banks to intervene will continue to support short-term bonds. The behavior of the long end is more uncertain: yields could continue to rise due to inflation expectations, forced liquidations, and fears about debt sustainability; however, recession fears could exert downward pressure. Moreover, the weak 3-year bond auction in the U.S. recorded last night has intensified doubts about the safe-haven status of U.S. Treasuries, exacerbated by the loss of credibility in the country’s economic policy. We anticipate continued pressure on U.S. Treasuries,” adds the Head of Nominal Rates at Aberdeen Investments.
The Impact of Tariffs on U.S. and EU Bonds
According to Mauro Valle, Head of Fixed Income at Generali Asset Management (part of Generali Investments), over the last week, U.S. yields moved 30 basis points lower, reaching 3.9%, after Trump announced the global tariff plan and then retraced 20 basis points after the news of a 90-day suspension period.
“Real yields dropped to a low of 1.6% before returning to 2.0%; breakeven rates fell from 2.4% to 2.15%. Trump’s tariff plan impacted risk assets, and now the market is trying to assess the recession risk in the U.S. Market fears of a global recession are high and well-founded, as global trade is likely to decline significantly,” says Valle.
In his opinion, another risk factor to watch is the EU’s retaliation plan in response to U.S. tariffs: whether the EU will take a soft approach or not. “The market expects more Fed cuts, with up to 4 cuts by December, as the Fed will support the economy and employment despite the risk of inflation. But in his last speech, Powell confirmed his focus on the U.S. inflation profile. The ISM data confirmed the U.S. economy’s slowdown, and the labor report showed an improvement in non-farm payrolls but also a 4.2% unemployment rate. U.S. yields could continue to move within a range around the 4.0% level, given the high level of uncertainty and the growing term premium investors will demand for long-term U.S. yields. Considering possible Fed support, if the scenario deteriorates, the U.S. curve steepening could continue,” explains this expert.
In contrast, focusing on the European Union, Valle highlights that bund yields fell to the 2.5% level following the news of the tariffs — the level observed before the announcement of the German fiscal bazooka — and then rebounded to 2.6%. “The Eurozone scenario seems somewhat easier to interpret. Tariffs may have a moderately negative impact on EU growth but will be offset by German fiscal spending towards the end of 2025 and in 2026. Eurozone inflation is expected to continue declining in the coming months. The ECB could cut rates in upcoming meetings, bringing official rates below 2% if necessary, as the economy will be negatively affected by tariffs while inflation will likely be less sensitive to them. The market is close to fully pricing in a cut in April, and three cuts are expected before December,” comments the Head of Fixed Income at Generali AM.
Emerging Corporate Bonds and Tariffs: Beyond the Noise
We must not forget that trade policy and geopolitics have significant direct and indirect repercussions on emerging market companies. Countries like Mexico face direct consequences, though broader effects such as slowing growth, weakening risk sentiment, and emerging market currency turbulence are also evident.
For Siddharth Dahiya, Head of Emerging Market Corporate Debt, and Leo Morawiecki, Associate Investment Specialist in Fixed Income at Aberdeen Investment, credit markets have remained remarkably stable despite the rapid deterioration in risk sentiment over recent weeks. “Although emerging market credit has shown some weakness, spreads have only widened by one basis point so far in March, with a total return of -0.56%. The reaction of emerging market credit has been even milder: total returns of -0.22%, reflecting its resilience in a volatile geopolitical world,” they explain.
In this regard, they point out that local currency assets have held up against expectations of a potentially weaker U.S. dollar amid a faster and deeper rate-cutting cycle. “So far this year, the spot dollar index has weakened by 4.4%, while the Brazilian real, the Mexican peso, and the Polish zloty have posted total returns of over 3%. This should give emerging market central banks room to continue cutting official interest rates,” they note.
According to the analysis of Dahiya and Morawiecki, the greatest impact has occurred in spreads of oil and gas companies. However, they explain that this has been more due to the persistent weakness in oil prices and the intentions of the Organization of the Petroleum Exporting Countries (OPEC) to soon ease production cuts. “Although the repercussions have been limited, the tightening of financial conditions in the U.S. could lead to a rise in yield spreads globally. We are reassured by the strong initial balance sheets of emerging markets and the absence of major fiscal problems in some of the largest countries,” they conclude.
