April Overview Market Comments
On April 2, the Trump administration announced a new set of tariff measures, introducing a base global tariff rate of 10%, with higher rates for specific regions: 20% for Europe, 24% for Japan, and an additional 34% for China (bringing the total for this year to 54%). These rates were determined by each country’s bilateral goods trade deficit with the U.S., rather than their current tariff rates on U.S. goods. Estimates suggest that the latest measures raise the effective tariff rate to between 18% and 23%, a significant increase from the 2-3% at the beginning of the year, marking the highest levels since the early 1900s.
U.S. officials have indicated that there may be room for reducing these tariffs if trading partners refrain from retaliation or make concessions in other areas. The White House has stated that “reciprocal tariffs will remain in effect until President Trump determines that the threat posed by the trade deficit and underlying non-reciprocal treatment has been satisfied, resolved, or mitigated.” The global response to the latest round of U.S. tariffs will be closely monitored, although it remains unclear how policymakers will react. We anticipate that most countries will either seek to negotiate with the U.S. without retaliation or implement retaliatory measures without initially escalating tensions. However, the timeline for these negotiations remains uncertain.
Domestically, governments may also aim to mitigate the growth impact through fiscal policy. For instance, Spain has already announced a €14.1 billion tariff support plan, and Germany significantly increased its fiscal capacity in March to respond to U.S. policy changes. These tariffs are expected to negatively affect growth both globally and particularly in the U.S., where growth had been exceptionally strong until now. The implicit tax increase in the U.S. is projected to exceed 2.5% of GDP, representing the largest tax increase in decades, even before considering retaliatory actions or any other U.S. policy responses.
This situation is expected to exert upward pressure on inflation in the U.S., while likely serving as a deflationary impulse elsewhere unless significant retaliatory tariffs are enacted, and exchange rates depreciate substantially. For European and other central banks, this combination of factors strengthens the case for further easing. In the U.S., with a mix of weak growth and rising inflation, the Federal Reserve will face a more challenging position, ultimately needing to weigh which shock is more detrimental.
Developed Market Rate/Foreign Currency
Outlook
We are overweight duration in DM markets, aside from Japan, and retain curve steepening exposures in U.S. Treasuries and Bunds. Short maturity bonds have more potential to rally if the growth outlook deteriorates, as central banks could cut more aggressively if growth slows, helping to steepen the curve. Cross-market, we remain overweight duration in New Zealand and the UK versus the U.S. and Australia, as we think central banks in the former group have more room to cut rates than currently priced. In Japan, we recently increased the size of our underweight in duration given positive wage and price developments and remain long inflation breakevens. We continue to favour the Australian and U.S. dollars versus Canadian, and also maintain a positive view on the yen against various currencies including the Korean won and U.S. dollar.
Emerging Market Rate/Foreign Currency
Outlook
Emerging markets debt remains an attractive asset class especially when focusing on country fundamentals and countries with idiosyncratic risk. Concerns about U.S. foreign policy and tariff uncertainty remain causing volatility in global markets. We continue to monitor the potential impacts that tariffs might have at the individual country level and focus on individual countries’ policy reactions. A number of developed markets and emerging markets central banks cut rates during the month – opportunity remains in the local rates segments of the market. Finding investment opportunities in countries that are more removed or less sensitive to broader global volatility can provide diversification and additional value.
Corporate Credit
Outlook
Looking forward our base case remains constructive for credit supported by expectations of a “soft landing”– fiscal policy that remains supportive of growth/employment/consumption and strong corporate fundamentals, supported by corporate strategy that is low risk. Manageable net issuance coupled with strong demand for the “all-in” yield offered by IG credit is expected to create a supportive technical dynamic. When looking at credit spreads, we view the market as offering some value but see carry as the main driver of return, with additional gains coming from sector and, increasingly, security selection. Given the uncertain medium term fundamental backdrop, we have less confidence in material spread tightening.
We continue to be cautious on the high yield market as we begin the second quarter. This outlook includes the dynamic and uncertain evolution of trade, immigration and tax policy, the expectation for stickier inflation, slowing economic growth with an increased probability of recession, and elevated volatility. Yields remain historically attractive and the average spread in the high yield market, while more than 95 bps above post-Global Financial Crisis lows reached in January, remains susceptible to further widening. We come to this conclusion after a thorough analysis of factors including the evolving monetary policy of global central banks, U.S. and global economic growth, consumer health, the fundamentals of high yield issuers, technical conditions, and valuations. Ultimately, we believe that caution is warranted and expect more comprehensive price realization, particularly in the lower-rated and more challenged segments of leveraged credit.
We continue to remain constructive on the global convertible bond market as we begin the second quarter. Convertible bonds maintained their balanced profile and generated positive total returns during what was a volatile first quarter. Given its bond floor feature, we believe the asset class will remain an attractive place to allocate capital in what we believe will be a volatile environment going forward. Finally, we believe primary issuance will pick up despite a disappointing first quarter. Corporations will need to continue balancing their financing needs with relatively high interest rates as well as the evolving monetary policies from global central banks.
