How a Trade War Can Hurt Bonds

A trade war can cause trouble for the bond market, mostly by pushing bond yields up and prices down. Here’s how that happens:

• Prices Go Up: Tariffs make imported goods more expensive, which can lead to higher inflation.
• Interest Rates Rise: To fight inflation, central banks may raise interest rates. Higher rates make borrowing more expensive and can hurt bond values.
• Less Foreign Buying: Trade tensions can scare off foreign investors, leading to lower demand for government bonds and even higher yields.
• Bonds Feel Less Safe: Normally, government bonds are considered safe during uncertain times. But in a trade war, confidence may drop, and investors might sell off bonds.
• Warning Sign of Recession: Trade wars can also lead to an “inverted yield curve,” where short-term bonds pay more than long-term ones—often a red flag for a coming recession.