Monthly Bond Commentary - April 2025

Talk of the TACO trade has been circulating in financial markets. Trump Always Chickens Out, TACO for short, certainly appears to have some merit as the president continues to row back on his barrage of unfounded tariffs. Latest in the mix have been auto and film tariffs, sectors which are both extensively integrated with the global economy, a fact that seems to have had little consideration when headline tariff rates were announced. The complexities, impracticalities or impossibilities of applying tariffs to a service sector like film also appear overlooked. We have seen many theories of the underlying incentives for Trump to implement tariffs in this manner, but we remain unconvinced there is a logical reason beyond use as a bargaining chip in trade deals - which as yet look very few and far between; neither China's nor the UK deal are formal trade agreements.

The question is, have global bond markets priced in the greater uncertainty and volatility in the US moving forward? The Treasury curve steepened in April as long-end yields rose 10bp while the short-end rallied close to 30bps. Long-end yields are typically more closely related to government policy while the short-end is anchored by central bank interest rates. Therefore, these moves are direct evidence of the TACO trade in action and that the steepening is, in academic terms, due to a rising term premium. In plainer language this is an extra cost the US government must pay for the increased uncertainty imposed on holders of US Treasury bonds. Holders such as China and Japan which own 9% and 12% of the entire Treasury market, respectively, a fact not likely to be forgotten in trade negotiations.

Whilst on the macroeconomic front, we note that the Fed held interest rates stable at their recent May meeting and much like investors are waiting to see what the impact of tariffs will be. The outcome was expected by the market and served to confirm what many believed they knew anyway, the risk of stagflation has increased since the last meeting in March but we don't yet know the extent of impacts on inflation or unemployment.

Finally, we approach the end of first quarter earnings with a positive view of the 3-months to March. Aggregate earnings have beaten expectations by more than 7% according to JP Morgan research and share buybacks announced for S&P 500 firms in the next quarter are a record $518bn. Generally, this is a positive sign for credit investors and demonstrates confidence from executives in their underlying business, despite tariff uncertainty. That being said, we have also seen many firms pull earnings guidance because of trade uncertainty, so the outlook may not be so rosy in the next three quarters of 2025 for equity investors. Credit on the other hand will benefit from the strong fundamentals, has less downside risk and may well outperform equities if full year earnings and economic growth disappoint.