It’s been three months since bond yields soared, as investors sold off U.S. government debt in response to President Donald Trump’s so-called reciprocal tariffs. The 90-day pause he announced afterward expires July 9, with potentially significant implications for the second half of the year.
Investors have prepared for 10% global tariffs, according to Robin Marshall and Sandrine Soubeyran, both directors of global investment research at FTSE Russell. But they said in an interview Friday that if Trump reverts to tariffs in the 25% range, “there’s still a risk of flare-up,” as Marshall put it.
While stockholders recovered their April losses and saw markets hit new highs, fixed-income investors bounced between risk-on and risk-off periods during a volatile second quarter.
“There’s proof now we are starting to see that all these fluctuations — all these [policy] changes back and forth — are really denting confidence,” Soubeyran said.
Purchasers are seeing increased prices as a result of tariffs as well. “Certainly in Canada, prices are starting to be passed through,” she said.
There is good news in all of this. Portfolio diversification opportunities are opening up — across asset classes and regions.
Investors have struggled with correlated stock and bond markets since inflation began rising during the Covid pandemic.
They exited equity positions and bought up government bonds, pushing yields down. Soon after however, governments — Canada’s included — made fiscal policy decisions that poured liquidity into the system. And so investors jumped back into the stock market, contributing to increased market correlation.
“Now we’ve got to this phase where equity markets are less bothered about inflation,” Marshall said. “Equities have been outperforming bonds through the first half of the year, notwithstanding that big dip in April. So the correlation is actually coming back down again.”
This offers portfolio diversification opportunities investors have recently had to seek through alternative assets.
“The two asset classes are beginning to go back to that era of lower correlation again, [as seen] from the mid-1990s to 2020,” Marshall said.
Also post-Covid, central banks have become less likely to follow the U.S. Federal Reserve’s lead on monetary policy.
“Now we’re seeing much more divergence,” Marshall said. “European central banks and the Bank of Canada have been much more focused on growth, while the Fed is more focused on inflation.”
The heyday of global trade deals and unbridled international commerce appears to be over, at least for now. While few investors are celebrating that shift, it may mean international markets move less in lockstep, according to Marshall.
“The only problem with [free trade] was that we all tended to go boom and bust together,” he said. “Now we’ve got this widespread divergence in inflation, policy, rates and growth. It’s a different type of world.”