Tariffs Come for the Bond Market, Too

The U.S. bond market has long been the bedrock of global financial stability, its yields a barometer of economic health and investor confidence. But in 2025, President Trump’s sweeping tariff policies upended this equilibrium, triggering a cascade of disruptions that reshaped the calculus for bond investors. From soaring Treasury yields to shifting capital flows, the tariffs’ impact on fixed-income markets has been as profound as their effect on trade.

The Tariff Shock to Bond Markets

The tariffs, which imposed a minimum 10% levy on all imports and higher rates on 57 countries, immediately altered the dynamics of global capital allocation. By reducing the value of U.S. imports—projected to drop by $6.9 trillion over a decade—the policies curtailed the inflow of foreign capital that traditionally finances U.S. government debt. Foreign buyers, who once purchased Treasuries with trade surpluses, scaled back their demand. The result? A 45-basis-point spike in the 30-year Treasury yield in just four days starting April 7, 2025, the largest such move since 1990.

This surge reflected more than mere market jitters. Investors priced in fears of inflation, swelling fiscal deficits, and the Federal Reserve’s struggle to rein in borrowing costs. Meanwhile, the Economic Policy Uncertainty (EPU) Index—a gauge of policy-related instability—doubled by March 2025, reaching pandemic-era levels. This uncertainty depressed investment by 4.4% in 2025, diverting capital from productive projects to safer havens.

The Flight from Equities, Toward Bonds (and Away Again)

The tariffs triggered a historic shift in asset allocation. U.S. equities faced a “roller-coaster” decline, with a blended portfolio of stocks and bonds losing 10% in the first year. In contrast, international developed markets and commodities like gold surged. Yet even bonds were not immune to volatility.

While the Penn Wharton Budget Model (PWBM) projected households would absorb more government debt to offset reduced foreign demand—a move that would typically boost bond prices—the reality was murkier. The EPU-driven flight to safety initially buoyed Treasuries, but inflation fears and fiscal risks soon outweighed this effect. The 10-year Treasury yield, for instance, rose to 4.2% by mid-2025, up from 3.5% in early 2024, eroding bond returns for income investors.

The Global Spillover: Weaker Dollar, Stronger Volatility

The tariffs’ ripple effects extended beyond U.S. borders. Canada’s economy, a key trade partner, faced a 2.1% long-term GDP contraction due to retaliatory measures. Mexico and China also saw modest declines, while the EU’s auto sector braced for an 8.4% price surge from tariffs. These spillovers weakened the U.S. dollar, which fell sharply in early 2025, despite reduced imports that should have strengthened it.

The dollar’s decline amplified uncertainty for bond investors. A weaker greenback often signals reduced demand for dollar-denominated assets like Treasuries, but in 2025, inflation and fiscal risks took precedence. This tension left bond markets in a tug-of-war between safety-seeking investors and deteriorating fundamentals.

The Long Game: Debt, Demographics, and Decline

The tariffs’ most enduring impact may lie in their structural effects on the economy. The PWBM estimates that by 2054, U.S. GDP could shrink by 5.1–6.3% due to reduced trade and capital flows. Wages, too, would fall by 3.9–5.8%, with middle-income households losing $22,000 in lifetime income. Even high-income households faced losses, as tariffs’ regressive nature hit lower-income groups hardest—a dynamic that further dampened consumer spending and bond demand.

Meanwhile, the capital stock—the machinery, infrastructure, and technology driving productivity—is projected to decline by up to 12.2% by 2054. This erosion reduces the economy’s capacity to service debt, creating a vicious cycle: higher borrowing costs, lower growth, and weaker bond returns.

Conclusion: A New Era of Volatility

The 2025 tariffs have rewritten the rules for bond investors. By disrupting trade flows, inflaming policy uncertainty, and reshaping capital allocation, they have transformed Treasuries from a stable haven into a volatile instrument. The 45-basis-point yield spike in April and the $22 trillion drop in household wealth by 2054 are stark reminders of their toll.

For investors, the path forward is fraught. While tariffs may temporarily boost Treasury demand due to uncertainty, the long-term drag on growth and inflation risks suggest yields will remain elevated. Equity markets, meanwhile, face a prolonged reckoning with trade wars and supply chain disruptions.

In the end, the tariffs underscore a painful truth: protectionism, once unleashed, leaves no market untouched—not even the bond market, the economy’s last refuge.