Fixed Income At The Crossroads Of Trade And Trust

2025-04-12 00:30:00 ET

Summary

• Given current market dynamics and assuming no material capitulation on tariffs, our base case is for the FOMC to undertake a dovish shift, emphasizing the avoidance of a worst-case economic outcome over a full-throated continuation of its battle to curb elevated inflation.
• Fixed income markets have started to show signs of stress against the backdrop, with headwinds building in higher-quality sectors.
• Elevated market volatility will likely persist over the coming months, and fixed income investors should remain patient.

By Michael Goosay, Chief Investment Officer, Global Fixed Income

Coinciding with the overnight implementation of President Trump’s new tariffs, investors saw U.S. yields jump across the curve to start the day on Wednesday, with the 10-year peaking at 4.5% or +21 bps higher than the prior day’s close. While much of that initial move has since been reversed, following the U.S. Administration’s announcement that reciprocal tariffs would be reduced to 10% and subsequently paused for 90-days on all nations but China, markets remain on edge. It is challenging to identify a singular force behind Wednesday’s early price action, but the gradual actualization of tariffs and enactment of reciprocal countermeasures abroad has led investors to increasingly adopt the narrative that a recession and/or stagflation in the U.S. is a probable outcome. At the same time, the consideration of safe-haven assets outside of the U.S. has increased as Liberation Day led to waning of credibility for the U.S. as a reliable global market participant....

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