Will History Rhyme? Fixed Income Themes During the First Trump Administration

Early in the second Trump administration, tariff threats have revived market volatility. Recent Treasury yield curve movements reflect this uncertainty, with markets reacting to both threatened and postponed tariffs against key trading partners. Short-term yields rose as markets pushed back expectations for Federal Reserve (Fed) rate cuts, while long-term yields declined on economic slowdown concerns and potential trade tensions. These yield curve dynamics mirror patterns seen during the first Trump presidency

During the first Trump administration, trade tensions between the U.S. and China moved both interest rate and credit markets (more below). As tariffs escalated, two key trends emerged in the rates market. First, investors grew worried about economic growth, pushing them toward safer assets like U.S. Treasury bonds. This pushed long-term bond yields lower, even as the Fed kept raising short-term rates.

Second, international capital flows have shifted dramatically. China reduced its U.S. bond holdings by over $100 billion as tensions peaked. However, global uncertainty actually increased overall foreign demand for U.S. bonds, as investors sought safety from trade-related market volatility. Manufacturing slowdowns and supply chain disruptions reinforced these trends. As global factory activity declined, investors grew even more cautious, further compressing long-term yields. The result was a flatter and eventually inverted yield curve — where long-term rates fell below short-term rates.

The Treasury Yield Curve Flattened During Trump 1.0

2Y/10Y Curve Spread

Source: LPL Research, Bloomberg 02/05/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Corporate credit markets have shown remarkable stability despite recent equity and rates volatility. High yield (HY) and investment grade (IG) option-adjusted spreads (OAS) remain near historic tights, with HY OAS in the 3rd percentile and IG in the 2nd percentile of their historical ranges (since 2002). Even CCC-rated bonds, the riskiest segment of high yield, trades in the 11th percentile — suggesting investors are showing unusual comfort with credit risk across the quality spectrum

A repeat of Trump 1.0 trade dynamics could bring heightened volatility to credit markets, which enter this period with significantly tighter spreads. During the 2018–2019 trade tensions, IG spreads widened 75 basis points from February 2018 cycle tights, while HY spreads expanded 225 basis points in just two months. While markets recovered in early 2019, volatility remained elevated throughout the year. Unlike 2019, when the Fed supported credit markets with rate cuts amid trade tensions, similar policy support appears unlikely given today's elevated inflation environment.

Corporate Credit Spreads Were Volatile Under Trump 1.0

Source: LPL Research, Bloomberg 02/05/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Credit markets have been remarkably resilient over the past few years due to an economy that has also been remarkably resilient. But it wouldn’t surprise us if spread volatility increased from currently very low levels. And with spreads near all-time tights, we don’t like the risk/reward in corporate credit markets currently. Caveat emptor. As for the rates market, while tariffs could initially drive a lower trading range through safe-haven flows, any significant escalation could eventually push yields higher if tariffs prove inflationary, supply chains re-shore, and/or China reduces Treasury holdings more aggressively. The key will be monitoring the balance between growth fears (yields lower) and inflation risks (yields higher) in any new tariff regime. However Trump 2.0 plays out, fixed income investors may be in store for another bout of volatility.