Bonds Under Pressure: Tariffs to Deficits
Pressure. Pushing down on me, pressing down on you, no man ask for (Queen)
Bonds are under pressure this week, but not for the usual reasons. An appeals court blocked a big chunk of Trump’s tariffs, ruling them unconstitutional. They remain in place until October 14th, but if the court’s decision sticks, the government may have to refund hundreds of billions in duties already collected. That’s a blow to the deficit, and bond yields are climbing as investors react and long-term rates spike, sending stocks lower as well.
At the top of the year through April’s Liberation Day crash, the market loathed tariffs because of inflation and growth fears. Now the bond market hates them for a different reason: lost revenue. If these tariffs vanish, deficit pressures rise, interest costs climb on the snowballing $37 Trillion US. debt, and there will be repercussions.
Steepening Curve
Turned away from it all like a blind man. Sat on a fence, but it don’t work
While many economic and market experts have been downplaying the effects of the tariff wars since the May rebound along with euphoria from the Liberation Day stock bounce, long-term Treasury yields have quietly spiked. Tariff uncertainty and foreign selling are driving the move, pushing the yield curve into a steepening pattern. The gap between long-term and short-term bonds is widening, and higher long-term yields signal that investors expect inflation and want to be compensated for locking up their money.
A steepening curve usually reflects stronger growth or rising inflation expectations rather than recession fears. But with tariffs blocked in court and the Fed poised to cut, it could be a canary in the coal mine, signaling potential economic stress before it shows up elsewhere.
Whether Trump’s tariff hikes are eliminated or actually executed at 15%, we expect increased market volatility and mild reinflation either way. Core inflation (Core PCE) ticked up in August to 2.9%, the highest since February, quietly filtering through the economy. Prices haven’t yet spiked because many U.S. companies had front-loaded inventory in January, but the rise is enough to split Fed officials on the timing and magnitude of rate cuts.
Looking Forward from Tariffs to Deficits
It’s the terror of knowing what this world is about.
If inflation continues to creep higher, the 10-year Treasury yield could push even higher, keeping Treasury and mortgage rates elevated. Long-term rates remain outside the Fed’s direct control. On the upside, capital spending, deregulation, AI innovation, and the One Big Beautiful Bill tax cuts provide some support for the economy.
Looking forward into 2026, our strategy is to stay disciplined while being tactical and not over-react. Selective positioning across bonds, stocks, and alternative sectors, combined with broad diversification, will be key to managing volatility and capturing opportunities. Leaning too heavily on tech or the S&P 500 can leave investors exposed once the recent years of outperformance normalize.
The most important lesson remains: don’t overreact or try to predict the next move. Queen got it right—pressure exists. How you respond makes all the difference. As Sir John Templeton warned, the four most dangerous words in investing are: “this time it’s different.” Markets cycle, trends ebb and flow, and even if the next few quarters underperform, long-term averages smooth out short-term noise. What never changes is investor behavior. That’s why partnering with an experienced wealth management team is critical – to help build a disciplined portfolio strategy and mindset that stays steady through the ups and downs.
Consider Who is Paying Tariff Costs:
Watching some good friends screaming, Let me out
After a strong July, market volatility is likely to pick up, with all eyes on the September Fed meeting. Investors will weigh jobs data against tariff developments. Powell has suggested the Fed might treat tariff-driven inflation as a one-off, but if 15 percent tariffs hold, the impact may be more persistent than expected.
Tariff costs can be absorbed by foreign exporters, U.S. businesses, or consumers. Early rounds of China tariffs hit U.S. businesses first, as they absorbed price increases. By year-end, however, the cost could shift: consumers may shoulder roughly two-thirds, foreign exporters about 20%, and businesses less than 10% in our opinion. Companies importing goods bear the brunt, while U.S. producers protected from foreign competition can raise prices and benefit.
60/40 Portfolio – Bonds Under Pressure
Traditional balanced portfolios need more finesse these days to handle bond and stock volatility. Since the 2020 pandemic-driven inflation, the classic mix of stocks and bonds hasn’t offered the same cushion. Stocks and bonds are moving more in tandem, eroding the diversification that once protected portfolios. That old “negative correlation” that balanced risk before 2020 is no longer reliable.
Intermediate and long-term bonds have struggled over the past five years. (see chart below.) For investors, blindly sticking to a 60/40 allocation may no longer deliver the smooth ride it once did. Market swings in both equities and bonds can hit portfolios simultaneously, amplifying drawdowns. Managing risk now requires attention to duration, country, sector exposure, and alternative strategies to protect capital and preserve purchasing power in an era of moderating inflation and tighter monetary conditions.
Our client portfolio strategy has been active and tactical: lowering tech exposure in January, increasing commodity and defensive sectors in February, boosting international equities in March, and shifting a portion of bonds into short-term TIPS in May. This approach helped limit downside during the April liberation day sell-off and has produced above-par results of nearly 7% year-to-date in a portfolio positioned for stagflation rather than recession.
For our UHNW family office clients, we maintain more of a 30/30/30 stance between bonds, stocks and liquid alternatives including structured notes, private equity and private credit strategies along with near-cash vehicles paying north of 4%.
TARA vs TINA: The Bond Comeback
For five and a half years, bonds were the dead weight of the 60/40 portfolio. They offered no cushion, no juice. But 2025 is looking different. Fixed income has been one of the strongest asset classes year-to-date despite all the economic and tariff war uncertainty. (see chart below) Investment-grade corporates, municipals, even high yield are all showing gains upwards of 5%-6% ytd.
TINA (there is no alternative) was the mantra in the zero-rate world before 2020. Today, TARA—there are alternatives—has the upper hand. Yields north of 5% on quality credit, plus the potential for capital appreciation if rates slide, make bonds relevant again.
Credit spreads are whispering a different story than the doomers. The bond market doesn’t see imminent collapse, it sees resilience. If Powell delivers rate cuts, the bond side of portfolios could surprise to the upside. After years of disappointment, fixed income is back in the conversation.
What the Bond Market Is Projecting
Corporate bond yields offer a clear window into confidence in both the Fed and the economy. These yields reflect the return investors demand to lend to companies based on risk. When the economy is healthy and profits are growing, yields generally fall. When concerns rise, yields widen. Credit spreads, the extra yield above government bonds, tell a similar story about risk appetite.
Right now, corporate bond markets are signaling strong confidence. Credit yields and spreads are near multi-year lows, and high-yield spreads have tightened as well. Investors are clearly comfortable taking on corporate credit risk. This aligns with major stock indices hitting new all-time highs. Even as inflation jitters rattle parts of the bond market, underlying credit risk remains calm.
Why market confidence in the Fed matters
Rate cuts create opportunities across bond sectors
Whether long-term rates come down or not, bond yields are quite attractive in most sectors. For instance, the average yield for Treasurys is currently 4.3%, 5.4% for investment grade corporate bonds, and 5.9% for high yield debt. To help investors generate portfolio income, many of these bond sector yields are still far higher than the average levels since 2008 (see chart)
For stock investors, lower rates typically reduce borrowing costs for companies, which can increase growth rates. This can support higher valuations since future cash flows can be worth more today when interest rates are lower. The market’s recent all-time highs suggest investors are already positioning for this supportive environment.
Of course, when credit spreads are tight and market valuations are high, it’s important to remain disciplined. When spreads are compressed, corporate bonds may offer limited additional return potential and could face challenges if conditions deteriorate. Similarly, high valuations can also mean that long-run expected returns may be lower.
This doesn’t mean avoiding stocks or bonds entirely, cashing out, or trying to time the market, but instead highlights the importance of holding an appropriate asset allocation to balance these risks. A well-constructed portfolio can benefit from the current economic environment while maintaining protection against unexpected developments.
The bottom line? Even with corporate credit strong and bond yields appealing, tariffs, inflation, and Fed policy keep the risk picture uneven. Stocks and bonds may face headwinds whether the 15 percent tariffs are enforced or canceled, and inflation could quietly continue to filter through the economy. Sophisticated diversification across asset classes, sectors, and geographies and alternatives remains essential. A disciplined, well-structured portfolio allows investors to capture income and growth opportunities while managing risk in a market that can shift before the headlines catch up.
For more information on our firm or to request a complimentary investment and retirement check-up, call (561) 210-7887 or email jon.ulin@ulinwealth.com.
Author: Jon Ulin, CFP® is the founder and Managing Principal of Ulin & Co. Wealth Management, an independent advisory firm based in Boca Raton, South Florida for over 20 years. As a fiduciary wealth advisor, Jon helps successful individuals, families, and business owners nationwide with multi-generational planning, investment management, and retirement strategies. Learn more about Jon and our team at About/CV.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
