Did we mention there might be some volatility?

The first quarter of 2025 was marked by significant volatility, particularly in equity and fixed income markets, as tariffs introduced by President Trump disrupted global trade dynamics. The S&P 500 experienced a decline, while bonds outperformed equities for the first time since March 2020. This shift was driven by uncertainty surrounding tariffs and their potential impact on global markets, leading to widening credit spreads and declining interest rates.

The bond market's response to the tariff announcements was rational, with declining rates and widening credit spreads reflecting concerns over protectionist policies. These policies could undermine the disinflationary environment that has benefited the bond market for decades. Additionally, aggressive government sector cuts may lead to increased unemployment, further complicating the economic outlook.

Investors are now tasked with determining whether tax cuts and deregulation can occur swiftly enough to stave off a recession. The expectation of zero to negative growth in the coming quarters suggests a cautious approach, favoring risk-off positions. This involves maintaining longer durations and underweighting credit, particularly in high yield and investment-grade bonds, with the potential for further credit spread widening.

Emerging market bonds have shown resilience, but uncertainties related to the US dollar and global demand shifts warrant a neutral stance. Positive developments, such as a move towards zero tariffs or consensus on tax policies, could provide upside potential. However, escalating trade tensions or systemic disruptions remain significant risks. The use of diverse bond management strategies positions investors to potentially add value despite these challenges.