Non-U.S. Government Bonds Stand Out as Tariffs Dull the Shine of U.S. Treasuries
25 SEPT, 2025
By Jupiter AM
By Ariel Bezalel and Harry Richards, Investment Managers at Jupiter Asset Management
Tariffs have dominated the news cycle since Donald Trump won the presidency for a second time. Trump has imposed higher duties on imports from many trading partners, including the UK and the European Union, while negotiations continue with other major partners such as China. U.S. companies appear to have absorbed part of the costs. However, statements from executives suggest that from now on, consumers may bear a greater share of the burden.
The potential repercussions of tariffs that could push consumer prices higher have not yet been fully measured. The sharp rise in prices after COVID showed that the risk of knock-on effects cannot be ignored, which has added uncertainty to inflation expectations.
Tariffs are generally considered a consumption tax and could therefore reduce spending. In this regard, the U.S. economy seems to be losing steam: the latest macroeconomic data show clear signs of a slowdown in consumption, a weakening labor market, and problems in housing affordability. We believe that the impact of higher tariffs could be moderately negative for U.S. growth and could offset the potential growth boost from Trump’s One Big Beautiful Bill Act (OBBA).
Recession Unlikely
Even so, a recession still seems unlikely, as several factors support the economy, such as a dominant services sector, the AI/technology revolution, and a strong stock market contributing to a positive wealth effect.
Although cyclical sectors such as manufacturing and housing construction could experience moments of weakness, we believe underlying services activity could provide a counterbalance. We are seeing an acceleration in tech infrastructure investments as a result of AI, which could give a boost to economic growth and raise productivity.
Given the current macroeconomic backdrop, we expect a gradual easing of monetary policy by the Fed, and the rate cuts currently priced in by markets seem realistic, especially after recent downward revisions to non-farm payrolls. Monetary policy could loosen faster if the labor market weakens, but the Fed might reconsider the pace if tariffs generate higher or more persistent inflation.
The ongoing clash with the Federal Reserve has raised questions about the central bank’s independence, adding another element of uncertainty. The fiscal outlook also remains very uncertain, and we see no evidence that the administration is willing to make structural adjustments to address the deficit problem.
Rate Cuts Outside the U.S.
The picture looks different outside the U.S. Major central banks such as the ECB, the RBA, and the RBNZ have eased their policies, with inflation slowing to near or even below their targets/bands, at a time when they face weaker growth prospects. Overall, this monetary easing environment is favorable for both sovereign and corporate bond markets.
On the fiscal side, the initial optimism around Germany’s investment program may be unjustified. We find it increasingly difficult to see new public spending being mobilized in Germany, as slow procurement processes and limited industrial capacity could make deploying funds more challenging than approving them in the first place.
European industry faces hurdles such as increased competition from China and higher energy costs compared to international peers. In France, public finances remain precarious and, politically, structural adjustments appear increasingly difficult to achieve. However, the “periphery” continues to shine, thanks to lower public debt-to-GDP ratios and strong tourism performance.
The UK has faced persistent inflation and concerns about public finances, but we believe recent inflation fears may be overstated. Post-pandemic growth has been relatively disappointing and not much better than in the eurozone. As volatile and transitory components fade, UK inflation should gradually fall, giving the Bank of England room to cut rates more times than currently expected.
Implications for Fixed Income
Tariff-driven inflation makes us less optimistic about the outlook for U.S. duration. While we find the market-priced U.S. rate cuts reasonable, risks exist both to the upside and downside. However, we expect weakness at the long end of the curve due to fiscal pressures, which could further steepen the yield curve.
Overall, we believe non-U.S. sovereign debt currently offers the best opportunities. Bond yields in the UK, Australia, New Zealand, and the eurozone remain elevated and there may be room for further declines. In emerging markets, we continue to find local-currency bonds in countries like Brazil and Mexico attractive.
We are cautiously optimistic on corporate credit risk. Spreads may be at historically low levels, but corporate bonds continue to be supported by a range of factors, both fundamental and technical. We believe this will continue to benefit defensive sectors such as communication services, healthcare, and consumer staples. Financial services also offer respectable relative value opportunities, while energy could benefit from increased demand driven by the AI revolution.
