Quick View: Fixed income markets take Trump’s tariffs in stride
Portfolio Managers John Lloyd and Greg Wilensky discuss how fixed income markets are responding to Trump’s sweeping tariffs and the implications for investors.
4 minute read
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 managers to 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.
Exhibit 1: One-day index returns following Trump tariff announcement (3 April 2025)
Fixed income assets have so far provided a ballast against the pullback in equities.
Source: Bloomberg, as of 3 April 2025. Indices used to represent asset classes: EuroAgg = Bloomberg EuroAgg Index (unhedged), Global Agg = Bloomberg Global Aggregate Bond Index (USD hedged), U.S. MBS = Bloomberg U.S. Mortgage-Backed Securities Index, U.S. Treasuries = Bloomberg U.S. Treasuries Index, U.S. Agg = Bloomberg U.S. Aggregate Bond Index, U.S. Securitized = Bloomberg U.S. Securitized: MBS/ABS/CMBS and Covered TR Index, Australian Equities = ASX200 Index, European Equities = STOXX Europe 600 Index, Japanese Equities = Nikkei 225 Index, U.S. Equities = S&P 500® Index. Past performance does not predict future results.
Summary
Many fixed income sectors are currently offering attractive yields in the mid-to-high single digits, with lower historical volatility than equities, and the recent widening in credit spreads has made valuations more attractive. Additionally, fixed income assets are once again exhibiting low or negative correlation to equities –which we view as an essential element of investment portfolios during uncertain times.
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.
IMPORTANT INFORMATION
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.
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.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
Specific risks
4 minute read
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.
