Tariffs: What may be the fallout from shifting trade policies?

Views from across Natixis Investment Managers’ active investment managers on tariff cause and effects, structural changes to the economy, heightened market volatility levels, inflationary impulses, and how fixed income and equity markets may digest a seismic shift in global trade policies are shared below.

Loomis, Sayles & Co. Head of Full Discretion Team, Matt Eagan

US Treasury Debt – The Great Intimidator: President Trump’s trade war, launched on “Liberation Day,” quickly collided with a more formidable force than foreign retaliation: the $27 trillion U.S. Treasury market. As yields surged and liquidity thinned, the bond market began flashing warning signs. A weak 3-year note auction set the tone, with 10- and 30-year auctions looming. Whether by design or by pressure, Trump took the offramp, pausing tariffs for 90 days.

To understand what comes next, it’s helpful to frame the constraints now shaping policy:

• Tariffs still weigh on growth and inflation. Even after the freeze, substantial tariffs remain in place. Their persistence could drag on economic activity and add to price pressures.
• The US holds a weak strategic hand in a global trade war. Picking fights with major trading partners who also finance your debt becomes especially risky with a wide fiscal deficit and no credible plan to rein it in.
• China remains the central showdown. Beijing views US trade actions as part of a broader containment strategy. While China faces its own economic pressures, its leadership has signaled a high tolerance for economic pain. In contrast, Trump faces the shorter political time horizon of elections and voter sentiment.
• Dollar dominance is not invincible. The trade war has introduced uncertainty about the long-term appeal of the US dollar as a reserve currency. While the dollar’s position is supported by deep capital markets and global trust, aggressive attempts to close the trade deficit risk unsettling this balance – particularly if they lead to long-term deglobalization.
• The Fed’s room to maneuver is limited. The central bank remains focused on fighting inflation and may hesitate to ease policy significantly. If labor markets weaken, a modest 25–50 basis points is plausible, but Powell is unlikely to offer a full monetary offset for any economic drag from trade tensions.

The risk-reward tradeoff for the tariff fight is worsening. A rational move would be to keep seeking offramps: securing targeted “deals,” winning symbolic concessions, and reducing headline risk around China. Some tariffs may remain, others may be eased or negotiated away. This strategy could yield modest wins without escalating economic costs – possibly the intended outcome all along.

Markets now shift their focus to two fronts: the evolution of trade negotiations and the pending budget bill. Hopes that fiscal stimulus could offset the drag from tariffs have dimmed. Recent volatility in the bond market has underscored concerns about the growing deficit. In fact, news about the growing prospect of the bill’s passage helped push yields higher at the long end.

Bond investors should stay vigilant. Treasuries offer liquidity and ballast in downturns, but that protection weakens when inflation rises or when fiscal credibility is in question. The recent price action suggests that the U.S. Treasury market itself could become a source of instability – a risk that now feels more plausible than remote.

Investors should demand proper compensation for extending duration. I favor the intermediate part of the curve; sub-5% long-end yields don’t justify the volatility, in my view.

My bond positioning is rooted in a belief that structural inflation pressures are real – driven by demographics, national security priorities, and the need for massive infrastructure and climate investment. These dynamics strain public finances and anchor real rates at a higher level for longer. Tariffs won’t solve those challenges. A serious fiscal plan – anchored in credible efforts to raise revenue and control spending – is the only durable solution. Until that materializes, my bond outlook remains unchanged.

Harris | Oakmark

Do the tariffs pose a paradigm shift for economic growth?

• We continue to hope that the tariff situation in the US is part of a negotiation process with other countries, and while we expect the situation to remain fluid, we think that the more draconian tariff measures may well be short lived.
• In terms of economic impact, if the tariffs remain in place for an extended period of time, the base case scenario would be higher inflation in the US, given tariffs are essentially just another form of corporate taxation, which will likely be passed on to consumers. It would also have a negative impact on global growth, possibly pulling many countries into recession, which would – in the short term at least – negatively impact the earnings of most companies, including many in which we are invested.
• It is important to look at all policies together and other proposed policy changes, including less regulation, maintaining tax cuts, and improving government efficiency which would generally be pro-growth and anti-inflationary, and could also help reduce government deficits. In addition, US policy uncertainty could provide an opportunity for countries outside the US to focus on domestic pro-growth initiatives, something which has been lacking in much of the world for many years.
• We believe that economic forces are stronger and longer lasting than political forces. If this policy is as bad as some fear, there are many checks and balances which could reverse it, including court rulings, Congressional action, pressure to change before mid-term elections, and if not before, the new president would likely reverse much of this in four years.

Are there structural changes underway that will impact your approach to investing for years to come?

• As market volatility has increased in recent weeks, we would remind investors that there have been many major events that have rocked the markets in the short term, but for prudent investors these periods have proven to be excellent buying opportunities.
• Throughout this period of uncertainty, we will remain disciplined and adhere to our philosophy and process, which has served us well through prior periods of macro volatility.
• Specific to Harris | Oakmark portfolios, we would remind investors that our value estimates are based on a company’s expected lifetime cash generation and therefore, the initial years’ cash flows have a limited impact on that intrinsic value estimate. When valuing companies, we do not attempt to predict Gross Domestic Product (GDP) growth or inflation, but rather consider company-specific factors, where we believe we can have greater insight. That said, as we model out earnings estimates we will adjust those earnings for companies most and least affected by tariffs, and also the near-term expectations of a lower economic growth outlook.

What structural and lasting effects does this shift is US trade policy have on markets, the economy, and the businesses you own or underwrite?

• While there are short-term risks to company profitability, companies have also had advanced notice of this policy. In speaking with management teams across our portfolio holdings, we found that many have already taken action, such as accelerating imports and ramping up US production where possible.
• If these tariffs were to be sustained for an extended period of time, we think companies will also shift production in ways that would be less costly than the current proposed levies. As always, we will continue to engage with company management and monitor both the risks and opportunities the current environment may provide. We will also adjust our intrinsic value estimates, if necessary.

Loomis, Sayles & Co. Core Plus Bond, Co-Manager Rick Raczkowski

We are certainly living in interesting times. The tariffs imposed on April 2nd turned out to be bigger and bolder than the markets, and frankly what we were expecting. And in our view, that's going to have some pretty significant consequences for the US economy in the near term, if nothing changes on the tariff front. In fact, we were already seeing signs of a stall in the economy during Q1. Consumer and business confidence had started to weaken, largely due to policy uncertainty. And on top of that, government spending had slowed. So the economic backdrop was already shaky before the full impact of tariffs even hit.

Looking ahead, it's tough to say exactly how this plays out because a lot depends on if and when these tariffs get rolled back and also what the potential retaliation from our trading partners could look like. And to be honest, we don't have a great historical roadmap here. None of us have seen tariff increases of this scale. So there's a lot of uncertainty around how it will work. For example, how much of the tariff costs gets passed on to consumers versus absorbed by producers or retailers?
 

Is stagflation back?

Depending on the percentage changes after negotiations are finalized, our view is that we could see a stagflation-like environment during the tariff phase in. But we don't believe this will be persistent. And in any event, we certainly will not be going back to the 1970s, when the US suffered double-digit inflation and unemployment rates. We just don't think the current economy can sustain that kind of long-term inflation.

Tariffs act like a tax on consumers. They reduce real income and purchasing power. And we were already seeing wages and income growth start to cool before the tariff announcements. The expected hit to real incomes is likely to dampen consumer spending, which in turn should limit how much inflation takes hold in the broader economy. But in the near term, there’s little doubt inflation's going higher, and growth is slowing.

That really puts the Fed in a tough spot. Because I think in a perfect world, the Fed might want to look past a short-term inflation bump from tariffs. But that's a hard ask when inflation's already above their 2% target and likely moving higher. One thing is for sure, the Fed does not want to let inflation expectations take hold. So unless we see a sharp economic downturn or a spike in unemployment, certainly both plausible, but something we're not forecasting right now, it's going to be tough for the Fed to start cutting rates aggressively. And that, in our view, raises the risk that the Fed may keep rates elevated longer than is ideal. So in short, there are a lot of moving parts. We're going to have to wait and see how these tariffs evolve.
 

Do you see consumer and corporate health deteriorating?

Given what we know about tariffs, we expect credit conditions could get worse, both for consumers and businesses. In our view, tariffs are basically taxes. They tend to push up inflation, while slowing down growth. And that combination is likely to pressure household budgets and company balance sheets, leading to more stress.

The silver lining is that prior to these tariff announcements overall credit health, both for consumers and companies, was in decent shape, albeit with some cracks in the foundations that bear watching. One theme that has been consistent for both consumers and businesses is a divide between the haves and the have nots. On the consumer front, balance sheets look strong overall, and debt levels are relatively low. But that's mostly thanks to wealthier households. The top 10% of earners now make up about 50% of total consumer spending, which is a record. And that group has been able to lock in low mortgage rates and have benefited from rising stock and home prices. But here is the issue: That also means they're more exposed if asset prices, especially stocks, take a hit. And that's of course what's been happening and poses a risk to spending going forward.

Lower-income households, on the other hand, aren't as tied to the stock market. But they're feeling inflation and rising interest rates more acutely. And tariffs mean a loss of purchasing power there. Many lower-income households have floating-rate debt and were already seeing signs of strain, like rising delinquencies on credit cards and auto loans. So far, strong unemployment has helped cushion the blow to these households, but any weakness in the job market could change that fast. On the corporate credit side, similar story. Big investment-grade and high-yield firms took advantage of low rates in 2020 and locked in cheap, long-term debt. On the investment-grade side, credit ratings have been actually improving. We've been seeing more upgrades than downgrades, and default rates for high-yield bonds are still low. In fact, we've seen more companies move up from high yield to investment grade than the other way around.

But investment grade and high yield companies, they're not immune to a potential global slowdown. And under that scenario, which is looking more likely, we should expect credit deterioration. But because the underlying fundamentals were starting from such a strong position, it could limit the impact of spread widening. Where it gets shakier is with mid-size companies that rely on floating-rate bank loans. They're much more sensitive to rising inflation and slowing growth. Default rates have been rising in that part of the market. And it's an area to keep an eye on if a tariff-led, stagflation-type environment becomes more of a reality.

Harris | Oakmark Head of Fixed-Income, Adam Abbas

The tariffs that were implemented last week did certainly affect the short-run dynamics of the marketplace. And, given their magnitude and breadth, they have the potential for longer-run consequences – visa-a-vis the actual tariffs, the implicit tax related to those tariffs, deglobalization that is further accelerated because of some of these trade policies, and interrelated, the potential for more entrenched inflation.

What I want to emphasize, however, is even with these incremental risks that are coming into the marketplace, fixed income yields are still quite compelling all-in versus history. Today, you can own a triple B-rated business, ones that are strong businesses with good balance sheets that default historically on average about 1.2% annually. And so you could collect about 6.5% now from these triple B bonds over 30 years. You know, if you think inflation kind of runs around 2.5% for the next three years, you're picking up 4% annualized real returns over the 30-year period. So that compares very nicely to the zero interest rate era that we were in for most of the past decade and a half.

If you prefer to own a high yield bond, let’s say a 3-year double B bond, that historically defaults about 1% or 2% of the time – that’s one or two times out of 100. Maybe the market is inching that up over the last couple of days, so you can get about 7% now for three years. Double B's have repriced almost a full percent and a half in a matter of weeks. So the all-in yields, even assuming inflation stays in the Fed’s goal of Fed's goal of 2%, or even 3 to 3.5%, you're still getting really solid real returns from the fixed income market. Not that there aren’t risks in the marketplace, but the all-in yields are quite attractive and they're starting to embed a lot of those risks.
 

How might tariffs affect inflation, growth, and Fed?

This is really a new shock. Tariffs function like a tax on the supply chain to raise input costs for US businesses. And in many cases, those costs find their way to the consumer. I expect these effects to show up quite quickly in Consumer Price Index (CPI), which captures out-of-pocket spending. I think my best estimate is a ten percentage point increase trade cost. It should be about 50 basis points in CPI. Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, lags a little bit but could look quite similar.

The growth side is unclear, but you could expect somewhere between 30 to 50 basis points to be shaved off GDP – if we’re again talking about the size and breadth of the tariffs currently being talked about. So this does mean that you have to think about the cyclicality of the businesses you're underwriting. What composition of that GDP do they own? And think about can my business remain resilient in what could be a slower and inflationary environment that we call stagflation. So that means critical credit underwriting. You really need to understand your downside case.

I think the risks of inflation being sticky and being above that 2% Fed mandate have gone up quite considerably over the last month. I think that leads me to believe we're not going to get any cuts anytime soon. I believe that volatility will remain high and that will give opportunity for active funds that are looking for individual credit ideas. Because when the market gets scared, when spread volatility goes higher, generally speaking, it gives opportunity to individual names that maybe trade with fear and less on fundamentals. And we haven't seen that environment for the last couple of years. It's really been one trade tighter. So here at Oakmark, despite the near-term mark-to-market bang, we're actually quite optimistic about future expected returns related to this current volatility.

Vaughan Nelson CEO, CIO, Chris Wallis

Let’s just step back and look at what has really transpired. 

• We have known that our deficits were unsustainable and that the rate of both our current account deficit and trade deficit had become significantly out of balance. And, we had been sustaining economic activity in the US by running deficits two to three times larger than the rest of the developed world. 
• And we’ve been crowding money into the US because that is a very favorable environment. So we reached a point where we really couldn’t continue to run the deficits at these levels and fund the activity through capital markets. 
• That’s why all the funding had been crowded into the short end. We know interest rates are too high to roll, and we need a weaker economy to hopefully trigger some demand for US Treasury so that we can refinance out into the belly of the curve. 
• So, we have to cut federal spending and raise taxes. It’s as simple as that. That is how we’re going to reconcile the excessively large deficits that we are running. Well, we were set to have the previous tax cuts expire, so that would raise taxes. We weren’t yet prepared to cut the federal spending, but that was going to be needed, as well. Just raising taxes alone would make it actually increase the deficits. 
• And so what have we done? Tariffs are just a tax. That’s all that they are. It doesn’t matter that people don’t think it was calculated correctly. None of it matters. What this has done is we’ve increased tariffs, which means instead of raising taxes directly on every citizen or directly on corporate earnings, we’ve spread it across supply chains, currency markets, and what DOGE (The Department of Government Efficiency) has done is cut federal spending.
• From a counterfactual standpoint, we were going to have taxes go up and federal spending cuts anyways. But when you’re in a political system, you have to do it through politics. In a lot of ways, it looks like we’re breaking the system to rebuild it. The other thing that I think, overall, we’re in no different position than we otherwise would be. And the elements in what we’re going to recess is the excessive ownership of large cap US stocks. 
• We’ve talked for a while that capital controls were going to come into vogue. And the way these tariffs have been implemented, it’s a very asymmetric impact on the US relative to our trading partners. So I suspect from this point going forward, there’s going to be renegotiations, exemptions, things such as that for countries that comply and don’t retaliate. For those that do retaliate, we’re going to ramp it up against them. 
• But this was all about raising revenue. And if we raise revenue, then we can get the tax cuts permanent, and we can shift that across the marketplace. 
• Let’s talk tariffs. We have basically increased tariffs in this country 20%. That’s a 2% increase in CPI if there’s no adjustments whatsoever in currencies. Well, guess what? There are adjustments in currencies. The Mexican peso was down almost 20% by the time Trump got elected. So those elements play out. 
• When you look at the underlying tariffs, even on cars, you have to break down and look at the subcomponents of those vehicles. So maybe you’re going to see on average, 40% to 60% of a vehicle is actually going to be subject to a tariff. I really think in the grand scheme of things, the tariffs are a non-event. And what would the result be? What would we want to see? We want to see interest rates lower and the US dollar lower, because the dollar has been too high. 
• We’ve talked for three to four months about how liquidity was very scarce. We need to increase liquidity in the system. Well, guess what?  When you lower the dollar, that helps flow liquidity into the system. 
• Tariffs are not inflationary. It will shift from one part of the consumer basket to the other part of the consumer basket. And so we’re still in that rebalancing mode.  

Gateway Investment Advisers, Joseph Ferrara, Investment Strategist

We are in a really interesting volatile environment. So, conversations with clients are always thought-provoking and maybe tough. However, this is a time when Gateway’s suite of products can shine. The Gateway portfolios are functioning as expected, providing that low volatility profile for our clients. Gateway is a long-term believer in the US economy and global economies, and where we feel our expertise continues to be, is derivatives and monetizing volatility. As I look today, April 9, the VIX (Cboe Volatility Index) hit 50 and we have seen it spike and stay at elevated levels over the last month.

When looking back at three comparable periods for the VIX – 9/11, the Global Financial Crisis, and the start of Covid in 2020 – and comparing them to today’s environment, they had significantly different dynamics. Certainly, causation, but also different dynamics as to how quick the market was able to digest whatever the event was initially and then how long or how prolonged the market stayed low from a stock standpoint or elevated from a volatility standpoint. We've had two consecutive years that the S&P 500^® was over 20%. I don't think anybody is upset about that necessarily. But it's a very real question of how clients can continue to participate in equities while taking advantage of this volatility environment, and that’s something the Gateway products are helping to provide year to date.

While we have seen the headlines generate a lot of volatility today, the true unknown of the real-world impact of this rhetoric is still to come. It’s possible that the VIX will remain elevated as we go through earnings season that is coming up, a period where we are already seeing companies like Delta pull guidance and imply that an upcoming recession is likely. Companies have less direction, less sense of where these tariffs are going to hit them. And as a result, there is the possibility that this heightened VIX environment persists as we see uncertainty in the real economy.

As we look at factors that might have a place in clients’ portfolios beyond broad low-volatility solutions, we continue to believe in the quality factor. Companies in this universe have cash on hand. They're not going to go bankrupt tomorrow. We know that they will work through the economic impact of tariffs. Compare that to lower-quality businesses. It may not be as positive a picture for some of those businesses that are really going to struggle, whether it's meeting their debt obligations, or just having their business kind of shrivel up if they're tied closely to the consumer, and consumer spending comes down.