A tariff-ic time for bonds

The highly anticipated unveiling of President Trump’s tariff policy has been harder hitting than many economists and markets had hoped. Our full spectrum of active levers (physical and derivatives – where permitted) will continue to be utilised to navigate the unfolding environment.

These announcements and accompanying volatility highlight the important role that fixed income can play in portfolios and the benefits of active management.

Our experience navigating crises and conservative positioning in portfolios makes us confident in our ability to benefit from the current environment.

Tariff announcements by the US outlined:

1. 10% universal tariffs,
2. Further country specific reciprocal tariffs,
3. A 25% tariff on autos.

Together the tariffs raise the average US tariff rate to >20%, up from ~2.5% in 2024 and ~7% in early 2025. These rates may change in coming days, as the 10% is applied on the 5th April and reciprocal tariffs on the 9th of April. Regardless, US tariff rates will rise and the uncertainty over policy will further damage investment and spending decisions.

These announcements represent a dramatic change in bilateral trade agreements, highly skewed to Australia’s biggest trading partners. China, Japan and South-East Asia, have tariffs ranging from 30-57%. Australia has a relatively small 10% applied, while one of our major exports to the US, pharmaceuticals, is exempt. The direct Australia-US relationship isn’t the problem here, but the impact on our largest trading partners and broad global growth is.

Economic Implications

For Australia, we lower our GDP forecast from 2.5%yoy to 2.1% in 2025, but the risk is to the downside. Inflation domestically may not be much higher, as demand is soft and supply may be re-directed from the US to other markets like Australia, or domestic markets for Australian exporters. This is highly uncertain. We are likely to see a generalised rise in global pricing, which may offset any local declines. For now, we aren’t changing our central CPI forecasts.

Our RBA base case remains a 100 basis points (bps) easing in total, equal to a cash rate of 3.35% by end 2025. We have increased the low case to a total easing of 250bps over the next year, to a low of 1.85%, and assign a 25% chance of this case playing out. Markets are pricing a low in the RBA cash rate of 3.28% through mid- 2026 not far off our central case.

Investment Implications

As we look forward to the volatile and widely dispersed set of possible outcomes, our bias remains to remain invested with a central investment thesis, but retain a blueprint for alternative cases and to navigate these using our full spectrum of active levers (physical and derivatives – where permitted) to navigate the unfolding environment.

The central case is a pro-growth environment from stimulatory moves in monetary policy and a supportive fiscal backdrop. Corporates in the IG space also remain well funded, highly profitable and resilient. Lower quality credit remains more vulnerable to large economic shocks. Whilst we have a central scenario, we are cognisant of the rising probability of geopolitics causing sentiment to adversely shift creating a negative feedback loop for the economy.

Notwithstanding the uncertainties and volatility, the domestic bond market outlook remains attractive, with defensive yields intact and clear opportunities for active management especially given disparate sector fundamentals and outlooks.