Update Bonds: Who pays the bill?
This week, the spotlight is on the bond market and the ongoing tariff negotiations. With several tariff deals announced, the macroeconomic data, alongside research and economic surveys, begin to reveal the inflationary impact of these tariffs.
During the second reporting period of 2025, company management discussions highlight the complexity in pinpointing who bears the inflationary burden of tariffs: consumers, US companies or foreign entities? What becomes evident, however, is that risk-on assets and soft macro data, such as sentiment indicators, have already pre-emptively priced-in these tariff agreements ahead of the 1 August deadline set by the Trump administration.
Corporate spreads have reached record lows, and US equity markets are soaring to all-time highs. Yet this bullish performance appears less impressive when viewed through the lens of a European investor, given the weak US dollar. Central banks are currently in a “summer break” mode, using this time to observe and validate further data. Meanwhile, the interest yield markets exhibit a more cautious stance, pricing-in higher term premiums in Japan, the eurozone and the US. This reflects the anticipation of increased debt financing due to stimulative fiscal policies in Japan, the "big, beautiful bill" in the US and defence spending ambitions in Germany and the EU. Consequently, yields on the long-end rise, whereby Japan is in a hiking cycle (with caution) and other central banks are moving away from quantitative stimulus through rate cuts, largely driven by the unresolved question that leads to uncertainties: Who pays the bill?
European Central Bank President Christine Lagarde has yet to provide a definitive answer, emphasizing reliance on data and the uncertain impact of tariffs, alongside the potential for a trade war between the EU and the US. She asserts that there is no room for rate cuts at present, while stressing the resilience of the eurozone economy. This sentiment underscores the cautious approach of central banks in the face of expensive risk-on assets and overbought markets, which are buoyed by optimism surrounding potential tariff deals.
Ultimately, the question remains: Who will pay the inflationary bill? As markets continue to rally on the hopes of favourable resolutions, the answer is elusive. Investors and policymakers alike are pondering the long-term consequences of these economic dynamics.