Update Bonds: Trump’s first 100 days
US President Donald Trump celebrated the end of the first 100 days of his second presidency this week, with a speech in Michigan highlighting his achievements. For investors, his presidency so far has been characterized by market volatility. The S&P 500 Index has fallen by more than 7%, marking the worst stock performance for this time period since Gerald Ford's first 100 days in 1974. Trump’s policy also impacted fixed-income markets.
With the announcement of his tariff policies on 2 April, Trump's sparked fears of a trade war and potential recession. This led investors to adopt a risk-off stance and to seek safer assets, resulting in increased government bond purchases. This demand pushed the ten-year Treasury yield to briefly below 4%, reaching its lowest level of the year on 4 April. Yields then rebounded, likely driven by inflation concerns, foreign selling (particularly by China) or forced selling by hedge funds. In particular, long-term yields went higher, with 30-year Treasury yields nearly touching 5%. Financial instability in the US Treasury market emerged as a critical issue. This was possibly the reason that Trump then chose to pause reciprocal tariffs for 90 days (except for China), thereby alleviating some fears.
Since then, market volatility, as measured by the VIX (US equity) and MOVE (US bonds) indices, has decreased from stressed levels but remains above average. Risk premiums on corporate and high-yield bonds show a similar pattern, though with spread levels still below historical averages. After Trump’s initial tariff announcement, the US dollar sharply declined against major currencies and has yet to fully recover, causing European investors to lose 9% on their dollar investments since the start of the year.
The European Central Bank has responded to the potential tariffs and their recessionary effects by cutting its policy rate three times this year, with expectations of further cuts to 1.5% by year-end. The German two-year bond yield has fallen to 1.7%, steepening the Bund curve. Meanwhile, the Federal Reserve remains in pause mode, with Chair Jerome Powell cautious about acting too quickly amidst rising inflation and a slowing economy.
President Donald Trump introduced a great deal of market volatility during his first 100 days in office. We continue to remain cautious and prefer investment-grade bonds over high-yield bonds.
Peter Bossaer