In relationships, I try to avoid sweeping generalizations. You never listen. I always do the dishes. Why do you always... (fill in the blank)? Let’s be honest, these statements are rarely 100% true and making them too often can land you in hot water.
This wisdom is applicable to investing. Narratives that gain enough consensus can carry the shortcomings of sweeping generalizations. We begin to take them at face value, forgetting to apply a reasonable doubt and instead calculating them in as certain outcomes.
Lately, I’ve noticed a dominating narrative—people saying tariffs are always bad for bonds.
Sure, it’s easy to see why tariffs might hurt bonds. They make imports more expensive, which raises costs for businesses and consumers. That can fuel inflation, pushing interest rates higher. And as every bond investor knows, higher rates mean lower bond prices. This was the dominant market narrative heading into the election, and it still lingers in market pricing today. After a rapid run-up, interest rates have cooled off a bit, but they’re still about 90 basis points higher than their September lows.
So, let’s exercise some reasonable doubt. Here are 10 reasons tariffs might actually push yields lower:
1. Economic Slowdown
Higher costs mean businesses might invest less, and consumers might spend less. Slower economic growth can push rates down.
2. Fed to the Rescue
If demand weakens enough, the Fed might step in and cut rates to prevent a recession.
3. Flight to Safety
Market uncertainty (which tariffs tend to create) often increases demand for safe-haven assets like U.S. Treasuries. Higher demand = lower yields.
4. A Stronger Domestic Economy?
If tariffs actually boost domestic growth by encouraging investment at home, demand for U.S. assets—Treasuries included—could rise, nudging yields lower.
5. The Market Effect
If everyone expects tariffs to drive rates higher, chances are the market has already priced it in. Any delay, adjustment, or unexpected outcome could send rates in the opposite direction.
6. Domestic Slack
If U.S. industries have unused capacity (think, idle factories), shifting demand to local production might not drive up prices as much as expected.
7. Efficiency Gains
Tariffs could force companies to improve domestic production efficiency and invest in new technology—both of which could drive costs down over time.
8. Weak Wage Growth
If wage growth stays sluggish and labor markets soften, businesses will struggle to raise prices, which keeps inflation and rates in check.
9. A Strong Dollar
If tariffs strengthen the U.S. dollar, it can offset some inflationary pressures by making imports relatively cheaper and lowering commodity costs.
10. Weak Foreign Demand
If major trading partners are dealing with economic struggles, they might lower export prices to stay competitive, offsetting some of the inflationary effects of tariffs.
So, What Now?
We’ve already seen rates ease a bit—the 10-year Treasury has drifted from 4.80% down to 4.54%. But that move from 3.60% to 4.80% sure made a lot of people sweat, didn’t it?
I’m not here to predict rates will definitely fall from here. My point is simple: keep an open mind. The global economy is constantly shifting, and market narratives can flip faster than you expect.
Disclosures:
This content has been prepared for informational purposes only and should not be considered as investment, tax, or legal advice. We recommend all investors to consult with a financial and/or tax advisor regarding their individual circumstances before taking investment decisions.
Investing in bonds exposes the investor to the risk of loss of principal. Lower and non-rated securities are more volatile and less liquid than investment grade bonds.
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