MW How investors can protect themselves from Trump's tariffs with bonds
By Joy Wiltermuth
'There's no reason to expose your investors to lower-quality credit,' said Adam Abass at Harris Oakmark
Stocks may be shrugging off earlier weakness tied to President Donald Trump's tactics on negotiating tariffs, but the bond market has been bracing for worse days ahead.
"There's no reason to expose your investors to lower-quality credit," Adam Abass, head of fixed income at Harris Oakmark, said in a phone call with MarketWatch Monday.
At least not when major policies from the Trump administration can shift on a dime and when a portfolio of highly rated corporate bonds, Treasurys and government-backed mortgage bonds can offer all-in yields in the region of 5.5% to 6%, Abass said.
Trump on Monday agreed to delay tariffs against Mexico for a month, following a conversation with Mexican President Claudia Sheinbaum. Trump rattled global markets early in the session after announcing 25% tariffs on Canada and Mexico and additional 10% tariffs on China over the weekend.
The blue-chip Dow Jones Industrial Average DJIA fell more than 600 points at the session's low before shrugging off most of those losses in afternoon trading.
"I've always been of the opinion that you have to see the actual results, as opposed to try to trade headlines around Trump," Abass said.
Risk assets roared higher in the wake of November's election on optimism around Trump's "pro-business" agenda and with Republicans sweeping to power in the House and Senate.
But financial markets lately have been more uncertain about what Trump's agenda might mean for investors.
Bitcoin (BTCUSD), the world's largest cryptocurrency, has been on a seesaw, surging to a record high above $108,000 in late January, then slipping below $98,700 early Monday before reclaiming $100,000, according to CoinDesk.
"People thought this would be a very business-friendly administration, including with a focus on tax reform," said Brij Khurana, a senior managing director at Wellington Management. Instead, out of the gate the focus has been on tariffs, limiting immigration and cost-cutting within the federal government.
Khurana views that policy agenda as likely to keep inflation pressures up and potentially to lead to slower U.S. growth. "The administration's focus has not been the market's hoped-for focus," he said.
Related: JPMorgan thinks this Trump administration might actually be business-unfriendly
Furthermore, market-based pricing as evidenced by Treasury Inflation-Protected Securities, or TIPS, already points to a big shift in sentiment in recent months.
The white line below reflects three-year inflation expectations climbing to about 2.85% recently, the highest in several years, while the consumer-price index, shown by the yellow line, has been fairly steady since it dropped from peak pandemic levels.
Aside from Trump's policy priorities, investors have endured a significant tech rout inspired by China's DeepSeek artificial-intelligence platform, which raised questions about potentially cheaper and less energy-intensive alternatives to the U.S. approach.
Shares of AI giant Nvidia Corp. $(NVDA)$ were off about 2% Monday and about 12% lower on the year so far, according to FactSet.
Yet the S&P 500 index SPX remains near its record close of 6,118.71, set on Jan. 23, despite jitters around DeepSeek and tariffs, both market-moving events in the first two weeks of Trump's second term.
Abass at Harris Oakmark remains wary that financial markets may be leaving too little room for error. Spreads on investment-grade and high-yield corporate bonds have been hovering near historic lows of 1% and 2.7%, respectively, over Treasury rates.
Spreads reflect the extra compensation that investors earn on bonds to help offset default risks or liquidity challenges in choppy markets.
Khurana at Wellington said he prefers government-agency mortgage-backed securities in the uncertain backdrop. "To me, there are just better places to deploy capital than credit," he said.
See: Markets leave 'no room for mistakes' in Trump's trade war, says famed investor Tudor Jones
Also read: Wall Street braces for more volatility ahead as Trump's tariffs rock markets
-Joy Wiltermuth
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(END) Dow Jones Newswires
February 03, 2025 15:33 ET (20:33 GMT)
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