BND, Fixed-Income ETFs Slip as Tariff Clock Expires

As the 90-day pause in reciprocal tariffs expires today, renewed fears of inflation have begun to ripple through U.S. fixed-income markets, as measured by the steady decline of the Vanguard Total Bond Market ETF (BND), the largest U.S. bond ETF by assets.

While President Donald Trump has finalized some limited trade agreements since the original April 7 announcement of sweeping tariffs, bond investors appear increasingly wary of the long-term inflationary impact.  

Meanwhile, the CME FedWatch tool shows only a 65% probability of a September rate cut, a sharp drop from over 90% just one week ago. The market's shifting stance suggests that the inflation threat posed by lingering tariffs may begin to take hold in the coming weeks and months.

BND has declined 1% since June 30 and has gained less than 1% since the 90-day tariff pause began.

Historic Tariff Burden Rekindles Inflation Concerns

The Yale Budget Lab estimated this week that U.S. consumers now face paying an average effective tariff rate of 17.6% across a broad range of goods, the highest since 1934. This historic burden threatens to raise the cost of consumer products, particularly in categories like electronics, apparel and raw materials, where global supply chains are heavily integrated.

The direct effect of these tariffs is to push prices higher, and that, in turn, could feed through to broader inflation measures like the Fed’s preferred benchmark, the Personal Consumption Expenditures Price Index (PCE).  

However, economists remain divided on the scale and timing of these effects. The uncertainty complicates the Federal Reserve’s monetary policy decisions, as it weighs the risk of persistent inflation against signs of slowing growth.

Why Inflation Hasn’t Surged Yet But Could Soon

Despite the high tariff rates, inflation has not yet accelerated meaningfully in recent months. Several factors help explain the delay: Many companies had pre-purchased inventory ahead of the tariffs, consumer spending remained relatively steady and global supply chain adjustments have created temporary buffers.  

However, these cushions are beginning to wear thin. As new shipments come in under higher tariff schedules and businesses pass costs to consumers, inflationary pressures could start surfacing more tangibly in the second half of the year.  

Should consumer prices rise faster than expected, the bond market may experience further outflows and higher yields, which would drive bond ETFs like BND lower. Moreover, equity markets could face renewed volatility if inflation undermines the rationale for additional Fed easing.

BND ETF, Fixed Income: Navigating Inflation Risk

The pause in tariffs and incremental trade agreements have provided brief relief for investors, but the underlying inflation risk remains embedded in policy. For the bond market, the recent decline in the BND ETF and other fixed-income funds underscores a growing nervousness about future pricing pressures.  

While Fed rate cuts are still likely in 2025, the timing and magnitude are becoming increasingly uncertain. Investors in fixed-income assets should stay attuned to incoming inflation data and Fed commentary, as the interplay between tariffs, consumer prices and monetary policy will shape bond ETF returns over the coming quarters.  

For now, caution may be the most prudent stance as both markets and policymakers navigate this complex and evolving landscape.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.

At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.