Tariffs strike more volatility

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

Liberation Day came and went but instead of providing the market with answers, it amplified the uncertainty that is rocking the financial markets. The only clear picture is that a serious and deliberate flight to quality is in motion. Treasury yields are moving rapidly lower, pushing prices higher.

First, I’m going to ask everyone to put their political hat back on the rack temporarily. Pro-president supporters will explain all the reasons why tariffs are a good idea, while the other side will expound on why they are not. There is too much going on with potentially enormous consequences, so we need to try to see the events without politics clouding our judgment. This is a big ask, though, because politics are at the forefront.

Market volatility can be dictated by uncontrollable events (such as a pandemic). There is calculated deliberation behind the curtain this go-around. One can easily argue that the White House and foreign countries’ responses to tariffs are shaping financial market reactions and consumer sentiment now. Investors are being inundated with white papers and articles proclaiming “how to invest” and “where interest rates are heading.” Now, I’m going to “wow” you with why this author is not headline news. I have no sensational advice to convince you what is going to happen because I don’t know, and I would argue that no one else does either. As a matter of fact, if we’ve ever been in a wait and see moment – it is now!

The Federal Reserve is like a deer in headlights. However, let’s give them some slack. Despite the sensational headlines declaring with absolute certainty what is next, the Fed, their reaction, and their policies actually have consequences. Tariffs may push prices higher, which could ignite inflation. Yet, if the net effect of tariffs creates new supply/chain issues, crushes consumer confidence, and craters consumer spending, a recession is not out of the question. One of the major Wall Street players has moved their expectation of a recession to ~60%. Two other major financial entities have opposing views. One states that the Fed is likely to move interest rates six times by year’s end, while the other explains that the Fed is not likely to make any moves in 2025. So, what is the Fed to do? Their only logical response is to maintain their position and monitor events as they evolve and perhaps signal what, if any, reaction is necessary.

Friday morning’s news was about how China hit back with retaliatory tariffs on U.S. imports. If the U.S. retaliates back and the cycle keeps repeating, we are likely headed for a recession as the price of goods potentially skyrockets. If it turns out that this entire reveal is to get all the interested parties to negotiate a logical compromise, and we assume that calmer heads do indeed gather to negotiate, a quick reversal could occur in the financial markets. For years, the U.S. has attempted to have allies and foes alike negotiate a comparable import/export tax policy only to be slighted each and every time. Is this forcing the hand of negotiation? Also, what is in the best interest of the U.S.? On one hand, we want to produce goods and services and give domestic companies a fair market chance to compete against foreign entities that are advantaged with low labor costs. On the other hand, we want our employees to have livable wages to support their family lifestyles. In addition, COVID brought to light that certain products need to be produced domestically for national security reasons – for example, pharmaceuticals and semiconductor products. In times of crisis, we don’t want to have to rely on foreign imports. It is understandable to seek instantaneous gratification and withdraw from adverse actions but sometimes long-term “fixes” come with disapproving or even labored steps. Is this one of those times?

Whatever the answer, how other countries react, and how we respond might skew this economy in a distinct manner. Panic is being created by planned political policy with many reactions and interchanges to go. The current hasty reactions will almost certainly be met by counter reactions as this plays out. Buckle up as this serious event unravels. The uncertainty will continue to promote a flight to quality, thus putting pressure on interest rates. The 10-year Treasury has dropped 31 basis points in a week (from 4.29% to 3.98%). Also, the volatility is likely to continue and the market may keep moving on its current trajectory or can shift quickly depending on how the tariff war unfolds. Opportunity may lie in wait. Once again, it’s a great comfort for those investing in custom bond portfolios to know that it is performing as intended to help preserve wealth, deliver known cash flows and produce a known timeline for return of principal regardless of all the noise.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

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To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.