Bond ETFs Surge As Trump Unveils Sweeping Tariffs

Bond ETFs rallied on Thursday after President Donald Trump unveiled sweeping “reciprocal tariffs” on America’s trading partners.

The yield on the 10-year U.S. Treasury briefly dipped below 4% for the first time since October, while the 30-year yield touched 4.43%—its lowest level in about a month. Bond ETFs such as the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) each climbed as much as 1.4% on the day.

Investors Analyze the Tariff Landscape

Investors were grappling with conflicting forces following Trump’s announcement. On one hand, the massive levies on imports could significantly raise inflation by increasing the cost of goods. 

On the other hand, they may curb consumer spending and business investment, potentially tipping the U.S. economy into a downturn, which could actually dampen inflation.

In a worst-case scenario, growth could slow and inflation could rise, raising the specter of stagflation—an outcome that would challenge both the Federal Reserve and markets.

Adding to the uncertainty is the question of whether these tariffs will actually stick. Over the past several weeks, Trump has floated—and then walked back—various tariff proposals, leaving investors unsure about what to expect.

Federal Reserve in Focus

Just as markets are struggling to make sense of the economic implications, so too is the Federal Reserve. In his March press conference, Fed Chair Jerome Powell signaled the central bank was in no hurry to act, emphasizing the need to “wait and see” how fiscal policy plays out.

Trump’s latest tariff announcement doesn’t provide much clarity, but it certainly increases the risk of an economic downturn, which could force the Fed’s hand.

Pricing in the fed funds futures market now reflects expectations of four rate cuts this year, up from just one before Trump began his tariff barrage.

Investors seem to be betting that growth concerns will eventually outweigh inflation concerns. 

On Thursday, 10-year breakeven inflation rates—a market-based gauge of expected inflation—hovered near their lowest levels of the year at 2.3%. 

In contrast, 2-year breakevens jumped by six basis points to 3.42%, the highest since 2022. The moves suggest investors expect more price pressures in the short term but not in the long term.