Trump's Tariff Uncertainty: A Tailwind for Treasurys?

The Trump administration’s 2025 tariff regime has created a paradox in global capital markets: while tariffs are traditionally seen as inflationary and economically contractionary, they have simultaneously driven demand for U.S. Treasurys as a risk-mitigation tool. This duality arises from the interplay of policy uncertainty, fiscal strain, and shifting investor behavior in a polarized economic environment.

The Tariff-Driven Economic Headwinds

Trump’s tariffs have pushed the U.S. average effective tariff rate to 19.5% in 2025—the highest since 1941—triggering a 1.8% short-run price-level increase and a projected 6% long-run GDP contraction [3]. These policies disproportionately burden lower-income households, with the bottom decile facing a short-run income loss of $2,400 per household [3]. The regressive impact is compounded by retaliatory measures from China, Canada, and the EU, which have further strained global supply chains and eroded consumer confidence [1].

Treasury Yields and the Erosion of Safe-Haven Status

Despite these economic headwinds, U.S. Treasury yields have surged. The 10-year yield climbed to 4.5% in Q2 2025, while the 30-year yield hit 5% amid fears of increased federal borrowing to offset lost tariff revenue [1]. However, this rise reflects a deeper structural shift: foreign investors, who hold nearly a third of U.S. Treasury debt, are demanding a 2.2% annual convenience yield premium—a level not seen since 1989 [3]. This signals a loss of confidence in Treasurys as a traditional safe-haven asset, as investors increasingly allocate capital to alternatives like gold, the Japanese yen, and short-duration bonds [4].

Capital Reallocation and the Paradox of Risk

The paradox lies in how tariff uncertainty is both a headwind and a tailwind for Treasurys. On one hand, the U.S. dollar depreciated 5% against major currencies in 2025, undermining its role as a reserve currency [3]. On the other, the U.S. fiscal outlook—projected to generate $4.5 trillion in tariff revenue over 10 years—has created a unique risk profile. Investors are hedging against policy volatility by overpaying for Treasurys with long-duration maturities, even as shorter-term bonds see reduced demand [6]. This bifurcation reflects a fragmented market: while Treasurys remain a refuge for short-term liquidity, their long-term appeal is waning.

Strategic Implications for Investors

For capital allocators, the key is to balance exposure to Treasurys with diversification into alternative safe-havens. The Trump tariff regime has amplified macroeconomic volatility, making short-duration bonds and inflation-linked securities more attractive. Meanwhile, the erosion of the U.S. dollar’s dominance suggests a strategic shift toward non-dollar assets, such as Swiss franc-denominated bonds or gold, to hedge against currency risk [4].

In conclusion, Trump’s tariffs have created a polarized economic environment where Treasurys serve as both a casualty and a beneficiary of uncertainty. While their traditional safe-haven status is eroding, their role in risk mitigation remains critical—provided investors navigate the shifting landscape with caution and agility.

Source:
[1] State of U.S. Tariffs: August 7, 2025 [https://budgetlab.yale.edu/research/state-us-tariffs-august-7-2025]
[2] Trump's Tariffs Lead Investors to Question the Future of the Dollar [https://www.gsb.stanford.edu/insights/trumps-tariffs-lead-investors-question-future-dollar]
[3] The Economic Effects of President Trump's Tariffs [https://budgetmodel.wharton.upenn.edu/issues/2025/4/10/economic-effects-of-president-trumps-tariffs]
[4] The Great Repricing: Are U.S. Treasuries Still a Safe Haven? [https://www.statestreet.com/hk/en/insights/the-great-repricing-us-treasuries]