Do bond investors need to care about tariffs?

By James Yardley on 24 February 2026 in Fixed income

The perils for the equity market from the tariff turmoil of the past few days are clear. Companies face uncertainty, and, potentially, higher costs. The implications for bond markets are harder to read. Any reversal in tariffs could boost the US economy, but may also lift inflationary pressures and raise the deficit.

The US treasury market has been relatively well-behaved in the immediate aftermath of the tariff announcement and the yield on US government bonds remains slightly lower than at the start of the year. Although there has been discussion of Europe selling down its vast holdings of US bonds in response to threats over Greenland, this has not been evident in the performance of the treasury market. US treasuries have historically behaved as a defensive asset during times of turmoil.

Why tariffs still matter for bonds

However, that is not to say that the bond market is immune to the changes on tariffs. If tariffs were removed altogether, it could boost US growth. Most economists believe that tariffs are a tax on corporate America and the US consumer. The removal of tariffs could improve the economy, while also potentially accelerating inflationary pressure.

Tariffs had also been acting as a break on the US deficit. The Committee for a Responsible Federal Budget suggests that the removal of tariff revenue could worsen the US’s budget shortfall by about $2 trillion over the next decade*. Tariff revenues had been running at around $30bn a month, with around $195bn collected in 2025*. All other factors being equal, higher growth and a higher deficit should push up bond yields.

It doesn’t help that the US economy was already relatively strong. Lloyd Harris, manager of the Premier Miton Strategic Monthly Income Bond fund says:

He also points to the new Fed Chair, who is likely to be more dovish than Jerome Powell. He says the US economy is ‘really working quite well’. If the Fed chair wants to cut rates into that strength, that would be another stimulus: “Bank deregulation should allow banks to lend more, hold more short-term government debt. It’s quite a positive backdrop for the US.” Ultimately, this is likely to push long-dated yields higher. Lloyd says the short-end of the US treasury market could come down a fraction, but the curve is likely to steepen.”

Inflation risks refuse to fade

Ariel Bezalel, manager of the Jupiter Strategic Bond fund, agrees:

He says that recent strength in commodity prices, combined with a weaker dollar, could also create inflationary pressures, despite ongoing easing in labour market conditions and continued moderation in housing costs**.

The most recent PCE inflation data seems to support this. This is the Federal Reserve’s preferred measure of inflation. It increased 2.9% year-on-year in December after gaining 2.8% in November***. It might have been expected to weaken in response to the government shutdown and slower growth, but hasn’t. This suggests inflation is stickier than many economists had hoped.

A temporary reprieve?

The one wrinkle in this assessment is that President Trump says he will replace the original tariffs with a single 15% tariff on everyone under the 1974 Trade Act. This can only last for 150 days, and it is not clear whether previously-negotiated exemptions and deals will apply. This could slow growth in the economy and help sustain tariff revenues, which might ease the pressure on bond markets, albeit at an unwelcome price.

Overall, the tariff problems may prove to be every bit as impactful for the bond market as for the equity market. The difference is that the equity market is bouncing around like a startled hare, while the bond market has barely responded at all. The period of calm may not endure.

*Source: Barron’s, 21 February 2026

**Source: Jupiter, 19 February 2026

***Source: Reuters, 20 February 2026