M&G: Comment on bond markets reaction to Trump tariffs
Andy Chorlton, CIO Fixed Income at M&G Investments, comments on Trump tariffs impact on bond markets.
Whilst the negative impact on growth due to trade barriers seems clear, the impact on inflation and therefore the response of central banks is much less so. This is probably best exemplified by the Chair of the Fed's recent comments in early April, stating that he felt the impact on inflation of any increase in tariffs would be transitory in nature, i.e. a one-off jump in prices. Just a few days later on Friday, he acknowledged that the impact of tariffs on both inflation and employment is unclear and is taking a wait and see approach.
With so much uncertainty about the final picture of tariffs, the Fed’s determination to combat any increase in inflation expectations is evident. It’s worth reminding ourselves that the Federal Reserve’s mandate commonly known as the ‘dual mandate’ relates to employment and inflation, rather than stable or rising equity markets. Nevertheless, investors obviously feel that the risk to growth is such, that their mandate will be challenged and the market is now expecting five rate cuts from the Fed in 2025.
M&G’s fixed income teams have been concerned for some months that credit spreads had priced in a lot of good news with little room for a negative surprise with spreads hovering around the most expensive levels we’ve seen since the Global Financial Crisis. This optimistic outlook spilled into government bond markets with little chance of any kind of slowdown priced in, and as a result we felt offered attractive valuations.
In summary, the market was quite complacent, so the starting point for this correction certainly contributed to the size of the moves we have seen in just a couple of days. Our value driven approach to Fixed Income ensured that our strategies were positioned defensively coming into Liberation Day and leaves us well placed to navigate these volatile times.
