How fixed-income managers are adapting to US tariffs

Described by President Donald Trump as “Liberation Day”, 2 April 2025 saw the announcement of a far higher than expected round of US trade tariffs. This created concerns around weaker economic growth, upward inflation pressures and the ability of the Federal Reserve to react to these new conditions.

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Fixed-income markets saw a fair share of volatility. In response to the initial US tariffs’ announcement, government bond yields, both in the US and Europe, fell across the curve, acting as safe-haven assets. The market priced in tariff-driven uncertainty and the increased probability of interest rate cuts as a result of the negative growth outlook.

However, later in April we saw divergence and US government bond yield curves steepened sharply, while European yields (mainly German Bunds and, to a lesser extent, UK gilts) continued falling. That said, US government bond yields (known as US Treasuries) normalised after the announcement of the 90-day pause.

Several factors led to the spike in US treasury yields. As tariffs will likely drive higher inflation, this created expectations that the Federal Reserve would not cut rates by as much as previously anticipated. Additionally, investors started demanding higher compensation (more yield) for holding long-dated US government bonds given the uncertain economic outlook. Foreign selling of US assets, including US Treasuries, further exacerbated the move in yields.

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In response to the initial US tariffs’ announcement, spreads in corporate bonds, both investment grade and high yield, widened significantly. Investors became concerned about the negative impact on corporate earnings due to the likely mix of higher production costs and lower revenues as demand slows. Similar to the move in US Treasuries, corporate bond spreads normalised after the announcement of the 90-day pause. A number of sector exceptions also alleviated concerns.

How did active fixed-income managers respond?

Global corporate bonds

BlueBay Global Investment Grade Corporate Bond fund increased risk by removing Euro CDS (credit default swap) index hedges and adding US issuers, especially banks. Overweights are held in banks, energy and technology, and underweights in tariff-sensitive sectors (capital goods and basic materials).

Janus Henderson Horizon Euro Corporate Bond fund shifted from cyclical, high-beta and tariff-sensitive sub-sectors (industrials, energy, real estate) to defensives (utilities, telecommunications, and food & beverage). The team reduced US exposure and credit beta, and increased cash to manage potential redemptions.  

Global high-yield bonds

Man High Yield Opportunities fund entered the tariff sell-off with low exposure to industrial cyclicals, consumer-related and leisure sectors and autos. Its largest overweight is in financials and most opportunities added recently were idiosyncratic.

AXAWF Global High Yield Bonds is overweight in services, software, and healthcare, and underweight in more asset-heavy sectors (energy, utilities, retail, autos and real estate). The team had reduced exposure to trade-policy exposed autos ahead of the US election in 2024 and shifted from EUR/GBP to USD in April.

Barings Global High Yield Bond fund holds underweights in cyclical sectors (energy, autos, retail) and basic industries (mainly chemicals) and overweight in defensives (healthcare and telecommunications). The team raised cash to around 5% for liquidity but also for dry powder to take advantage of new opportunities.

Flexible bond funds

Artemis Strategic Bond adjusted duration amid tariff-driven volatility, reducing US treasury exposure. As the dust settled and tariffs were paused, the managers later rotated from outperforming European rates into undervalued markets (Canada, Australia and US Treasury Inflation Protected Securities (TIPS)).

Capital Group Global High Income Opportunities (LUX) entered April cautiously, with a cash balance of 8.5%. Post-Liberation Day, the managers took advantage of the market sell-off and deployed cash into quality Asian sovereigns. On high yield, the fund maintains a cautious stance in tariff-sensitive sectors (consumer cyclical and capital goods), while the team is constructive on financials.

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In the first trading day after Liberation Day, Jupiter Strategic Bondused the short-term market reaction to reduce US duration in a meaningful way – a move that helped performance later in the month. Credit index risk hedges also helped cushion the spread volatility. Sector exposure remained stable with overweight in domestically oriented technology, media and telecoms (TMT), financials, and healthcare.

Looking ahead

US trade tariffs have created concerns over a slowdown in growth and higher inflation. While market volatility diminished on the subsequent announcement of a 90-day pause, uncertainty remains firmly in place. 

Most corporate bond and global high-yield bond managers did not make any material adjustments as they were well-positioned for the volatile environment that unfolded. In general, they are underweight in trade-sensitive and cyclical high beta sectors, such as industrial, materials, autos, consumer, while overweight allocations are focused on financials, and defensive sectors, such as utilities, telecommunications, healthcare.

Meanwhile, the global flexible-bond managers took diverse approaches. Some maintained their duration level but adjusted regional allocations, while others reduced duration, mainly in the US. Most managers attempted to take advantage of the market correction and opportunistically bought bonds that became attractively valued in their view.

Performance in general was satisfactory with most managers either performing in line or slightly better than their respective benchmarks in April. Some managers prudently raised cash to be able to meet unexpected redemptions but also to keep dry powder for new opportunities.

Market volatility is likely to persist, presenting a good opportunity for active fixed-income managers to demonstrate their ability to generate attractive risk-adjusted returns by actively managing exposures and conducting detailed bottom-up analysis.

Evangelia Gkeka is a senior analyst, fixed income strategies at Morningstar.