1. Introduction

On April 2, 2025, Donald Trump announced a new wave of large-scale tariff increases, calling it America’s “Liberation Day”. In this resounding declaration, he imposed a 10% universal tariff on all imports except those from Canada and Mexico, as well as additional tariffs of up to 50% on around sixty countries deemed commercially hostile, including China and several European Union member states ¹.

These announcements, the first measures of which took effect on April 5, 2025, sent shockwaves around the world. The European Union, directly targeted, saw its exports to the United States hit by surtaxes of up to 25%, particularly in the automotive, steel and agri-food sectors ². Although the European Commission has opted for a temporary suspension of any retaliation, it is nevertheless preparing targeted retaliatory measures.
China, for its part, has already reacted with surtaxes of up to 125% on American products, exacerbating trade tensions ³.

These protectionist policies come against a complex macroeconomic backdrop of persistent inflation, slowing global growth and restrictive monetary policies. Such decisions have an immediate impact on economic expectations, modifying market perceptions of risk, inflation and interest rate trajectories.

In this context, it is essential to ask: how might this new rate escalation influence the structure of the yield curve? And what would be the consequences for the bond market, in terms of valuation, liquidity and investor positioning?

This article analyzes the transmission mechanisms between trade tensions and yield curve dynamics. yield curve dynamics, based on historical precedents (notably the period 2018-2019) and current market dynamics.

2. Economic mechanisms involved

The sudden introduction of tariff barriers by a major economic power profoundly alters global macroeconomic equilibria. This section examines the main transmission channels through which tariff increases can influence inflationary dynamics, growth expectations and monetary policy reactions. These elements form the basis for the formation of the yield curve.

2.1. Inflationary effects of price increases

In practice, a customs tax is equivalent to an increase in the price of imports. In In an interconnected economic system, this increase is reflected in consumer prices (pass-through) via two main mechanisms:
– Direct transmission: imported goods become more expensive, immediately increasing the consumer price index (CPI), particularly in segments such as electronics, manufactured goods and processed agricultural products.
– Indirect transmission: companies exposed to foreign competition pass on the extra cost on final sales prices to preserve their margins, inducing an inflationary effect.
widespread.

In the case of the US, several analyses from the Federal Reserve network suggest that a A price shock of 10-20% could exert significant pressure on inflation. A study Federal Reserve Bank of Boston estimates that a combination of 25% tariffs on Canadian and Mexican imports, and Mexican imports, and 10% on imports from China, could add between between 0.5 and 0.8 percentage points to core PCE inflation, depending on the degree of pass-through in consumer prices ⁴. According to the Dallas Fed’s April 2025 TBOS survey, 55% of manufacturing companies anticipate higher selling prices in response to rising import costs ⁵. Finally, St. Louis Fed President Alberto Musalem stated that the recently announced tariff increases could add up to 1.2 percentage points to inflation PCE, highlighting the possibility of a longer-lasting impact than expected ⁶.

2.2. Potential slowdown in growth

In addition to their inflationary effects, price increases act as a tax on business. global economy. The additional costs imposed on companies reduce their competitiveness, squeezing margins… and is having an impact on investment and hiring decisions. On the household side, the rise in price reduces real purchasing power, leading to an adjustment in consumption. Uncertainty tensions and the fragmentation of global value chains is fuelling a general wait-and-see attitude economic agents to adopt a wait-and-see attitude.

International institutions have recently revised their growth forecasts downwards due to heightened trade tensions. According to the World Economic Outlook published by the International Monetary Fund in April 2025, Eurozone GDP growth is now expected to be 0.8% for 2025, compared with 1.0% in previous projections ⁷. The main reasons for this revision are the impact of protectionist measures on trade flows and supply chains.
The OECD confirmed this trend in its March 2025 Interim Economic Outlook, pointing out that pointing out that trade uncertainty and falling exports are weighing particularly heavily on the large industrial economies ⁸. Germany, heavily dependent on its industrial exports, has been identified as one of the countries most vulnerable to this deteriorating economic climate.

This anticipated slowdown in economic activity is directly reflected in the yield curve interest rates. Weak growth prompts investors to revise their expectations downwards of future returns, particularly on long maturities. This typically translates into long rates, while short rates can remain high if the central bank maintains a restrictive stance due to inflationary pressures. This configuration generates a flattened or even inverted yield curves, reflecting the perception of monetary tightening followed by an economic downturn. Historically, such reversals have often preceded phases of recession, making the shape of the curve a leading indicator of future economic dynamics.

2.3. Potentially favorable macroeconomic effects

Beyond the risks identified for growth and inflation, tariff measures can also produce positive macroeconomic effects in the medium term, particularly when they are part of a strategy to redeploy industry or rebalance external accounts.

Firstly, a universal tariff applied to imports is likely to help reduce the US current account deficit, by reducing import volumes and increasing demand for domestic producers. This dynamic could encourage a gradual rebalancing of the balance of payments, a recurring objective of US economic policy since the crisis of value chain globalization.

Secondly, tariffs can provide temporary protection for strategic sectors exposed to international competition (such as the automotive, electronics and steel industries), thus creating the conditions for a targeted boost to productive investment and industrial employment.
In this sense, the measures announced are in line with a logic of reindustrialization and economic sovereignty, at the crossroads of geopolitical and social concerns.

These potential positive effects must, however, be weighed against the immediate tensions generated on the markets, and assessed in terms of their sustainability within a multilateral framework.

2.4. Expected monetary policy reactions

Faced with this dual impetus – inflationary in the short term but recessionary in the medium term – monetary policy faces a dilemma. Initially, central banks could maintain, or even reinforce, their restrictive stance in order to stem imported inflationary pressures. However, if growth slows further, a premature normalization of rates could be envisaged.

This ambiguity is perceptible on the money markets through the evolution of implicit key rate curves (e.g. the Fed Funds futures curve), which reflect both an expectation of high rates in the short term and a fall in rates over a 12 to 24-month horizon.

3. Impact on the yield curve

The yield curve is a dynamic synthesis of growth, inflation and monetary policy expectations. As such, it reacts sensitively to exogenous shocks such as trade tensions and major tariff changes. In the current context, the Trump administration’s new protectionist strategy is influencing the structure of the yield curve through three mechanisms: short-term inflationary pressures, an anticipated slowdown in growth and adjustments in monetary expectations.

3.1. Curve flattening or inversion

When an inflationary shock coincides with a deterioration in growth prospects, the yield curve tends to flatten, or even invert. Short rates remain high due to the maintenance of a restrictive monetary policy aimed at containing price rises, while long rates incorporate a weakening economic outlook, or even future monetary easing. This configuration is particularly closely watched by investors, as it has historically preceded several episodes of recession.

3.2. Empirical elements and reading the Fed Funds Futures curve

U.S. money market data provide a concrete illustration of current expectations. The Fed Funds futures curve, as at May 2, 2025, reflects an implicit path of key rate cuts over the next two years:

This structure implies that markets expect monetary policy to remain restrictive until summer 2025, followed by a gradual easing cycle over 2026 and 2027, in response to a slowdown in activity. The expected trough of the curve around 3.2% in 2027 reflects a perception of high macroeconomic risk, possibly fuelled by the effects of current trade tensions.

The inflection of the curve between 2025 and 2027 can thus be interpreted as a signal of mistrust in the sustainability of the economic cycle. An inverted curve, where short rates exceed long rates, often reflects expectations of a slowdown, or even a recession. Against this backdrop, investors prefer longer-duration, safe-haven assets, further amplifying the fall in long rates and accentuating the convexity of the curve.

3.3. Feedback: tariff tensions and the yield curve in 20218-2019

The trade tensions between the United States and China, which peaked between 2018 and 2019 during Donald Trump’s first term in office, provide a particularly instructive precedent. During this period, several waves of tariff hikes were imposed on several hundred billion dollars’ worth of traded goods, stoking fears of an inflationary spiral. Yet the effects on import prices remained contained: according to an analysis by CPR Asset Management, imported inflation reached around 1% in 2018, before turning slightly negative again in 2019, thanks in part to the appreciation of the US dollar ⁹. A complementary analysis by CEPII points out that the overall macroeconomic impact of these measures turned out to be weaker than expected on inflation, but not negligible on business confidence and value chains ¹⁰.

Faced with rising trade uncertainties, the US Federal Reserve had adopted a more accommodative posture. After a phase of monetary tightening in 2018, it made three successive rate cuts in 2019, partially reversing the trend ¹¹. This monetary policy contributed to a marked flattening of the yield curve, followed by a temporary inversion of the 2Y-10Y spread in summer 2019, interpreted by the markets as a signal of recession ¹².

This historical sequence highlights two key lessons: (i) tariffs do not automatically translate into sustainable inflation, and (ii) the yield curve remains a leading indicator sensitive to monetary policy adjustments in the face of trade tensions. These observations provide a useful framework for understanding the current dynamics observed in 2025.

3.4. Interactions with the equity market

The current deformation of the yield curve cannot be interpreted in isolation. The equity market offers complementary, even converging signals, which reinforce the macro-financial analysis. On April 2, 2025, the announcement of “Liberation Day” by the Trump administration, formalizing the introduction of across-the-board tariffs on imports, triggered a sharp reaction from global stock markets: the S&P 500 fell by 3.15% over the session, while the Euro Stoxx 50 and CAC 40 were down 2.9% ¹³. A few days later, the announcement of a 90-day postponement of tariff measures for certain allied countries led to a partial rebound: the S&P 500 gained 0.1% and the CAC 40 0.2% on April 6 ¹⁴. However, this lull was short-lived. On April 7, the Euro Stoxx 50 recorded a historic single-session decline of 4.7%, its biggest since March 2022, illustrating the high sensitivity of European markets to heightened trade tensions ¹⁵. At the close of April, monthly index performances reflect an uncertain climate: the S&P 500 is down 0.76%(-5.31% since the start of the year), the Euro Stoxx 50 is down 1.1%, while the CAC 40 is up 0.5%. By contrast, the MSCI Emerging Markets index posted a robust performance of +2.9% in USD, supported by the rebound in Chinese stocks and the resilience of Asian markets ¹⁶.

This widespread market correction was accompanied by a significant rise in implied volatility. The VIX index, a barometer of risk aversion on equity markets, jumped from 21.77 on April 1 to a peak of 52.33 on April 8, 2025, before gradually falling back to close at 24.70 on April 30 ¹⁷. This upturn contrasts sharply with the first-quarter 2025 average of 18.5, with levels ranging from 14.8 to 27.9 ¹⁸. This regime break reflects a sharp revaluation of the equity risk premium, linked to trade tensions and fears of a macroeconomic slowdown. This volatility shock was coupled with a marked sector rotation: flows redirected towards so-called “defensive” stocks (healthcare, consumer staples and utilities) to the detriment of cyclical, technology and industrial stocks, more exposed to global value chains and international trade disruptions. This repositioning illustrates a phase of strategic retrenchment by investors, anxious to preserve capital in the face of growing uncertainty.

These movements reflect the anticipation of a more uncertain macroeconomic environment, characterized by pressure on profit margins, heightened investment caution and an expected slowdown in activity in sectors sensitive to world trade. In this context, the current configuration of the yield curve (inverted or flattened), depending on the zone, is not simply a monetary signal, but part of a market regime dominated by rising risk aversion and the search for stability.

The link between bond and equity dynamics is also evident in the positive correlation observed since mid-April: long rates have been falling while stock market indices have simultaneously lost ground. This joint movement, far from illustrating a healthy growth environment in which lower rates would be perceived as supportive, on the contrary reveals a pronounced risk-off phase. The fall in long-term sovereign yields is explained more by aflight-to-quality than by the expected easing of monetary policy. Investors are abandoning risky assets in favor of AAA-rated sovereign bonds, reflecting a pessimistic reassessment of global growth prospects. This synchronization of equity and fixed-income declines is a leading indicator of macro-financial stress, confirming the signals emitted by the yield curve: a downward revision of economic expectations and a return to a regime of generalized mistrust.

4. Introduction Mandatory market: arbitration and repositioning

Monetary policy expectations, inflationary pressures and growth prospects have a direct impact on the functioning of the bond market. The reconfiguration of the yield curve generates portfolio arbitrage, modifies capital flows between maturity segments, and influences the relative valuation of fixed-income securities.

This anticipated slowdown in economic activity is directly reflected in the yield curve. Indeed, weaker growth prompts investors to revise downwards their expectations of future yields, particularly on long maturities. This typically translates into lower long rates, while short rates may remain high if the central bank maintains a restrictive stance due to inflationary pressures. This configuration results in a flattened or even inverted yield curve, reflecting the perception of monetary tightening followed by an economic downturn. Historically, such inversions have often preceded recessionary phases, making the shape of the curve a leading indicator of future economic dynamics.

4.1. Curve deformation and market movements

Market operators react to macroeconomic developments by making tactical and strategic adjustments to their exposures. In the current context, two types of curve deformation are being considered in particular:

• Bear steepening : if inflationary pressures prevail, long rates may rise more sharply than short rates, causing the curve to slope upwards. This scenario is often linked to a loss of credibility on the part of central banks, or to expectations of lasting price slippage.
• Bull flattening : if an economic slowdown is expected, long rates fall while short rates remain stable or fall. This scenario reflects increased demand for long bonds, considered as safe havens.

Recent data tend to validate the second scenario. The positioning of institutional investors (pension funds, insurers, asset managers) shows a gradual reallocation towards long maturities, reflecting a search for security and the anticipation of monetary easing.

4.2. Interest rate trends to April 2025: volatility and readjustments

April 2025 was marked by significant volatility on bond markets, following the Trump administration’s protectionist announcements. Sovereign yields reacted differently over time, reflecting a two-stage dynamic: an initial shock triggering a pullback to safe havens, followed by a gradual adjustment in macroeconomic expectations.

American market. The yield on the 10-year US Treasury note has had a contrasting trajectory. It opened the month at 4.17% on April 1, then plummeted to 4.01% from April 4 ¹⁹. This decline can be explained by a classic flight-to-quality movement following the market shock caused by the announcement of “Liberation Day” and the onset of a reinforced protectionist cycle. Faced with a sharp correction in equity markets, investors temporarily favored sovereign bonds as defensive assets.

However, this downward phase was short-lived. Rates quickly recovered, peaking at 4.48% on April 11, driven by a reassessment of inflation expectations and a possible extension of the Fed’s restrictive cycle. The 90-day postponement announced for certain trading partners on April 9 brought a slight easing, without calling into question the upward trend. At the end of the month, the yield stood at 4.17%, back to its initial level in a context of cautious stabilization.

European market. In the eurozone, momentum was more moderate, although international tensions also had an impact on long rates. The yield on 10-year sovereign bonds (AAA rating) rose from 2.76% on April 1 to 2.68% on April 9, before beginning a marked reflux from mid-April ²⁰. The rate reached a low point of 2.55% on April 24, before closing at 2.56% at the end of the month. This gradual decline reflects a perception of lower inflationary risk compared to the US, as well as more restrained expectations about the ECB’s trajectory.

Nevertheless, European investors reacted to the prospects of a global slowdown and the stock market correction at the beginning of the month by favouring high-quality bonds. The contrasting trends of the CAC 40 and Euro Stoxx 50 (+0.5% and -1.1% respectively in April) illustrate these sectoral and geographic arbitrages in favor of stability.

Synthetic reading. A joint analysis of these rate movements reveals a three-stage sequence: (i) an immediate shock perceived as systemic, (ii) an increase in macroeconomic expectations, (iii) a partial stabilization under the effect of corrective announcements (90-day postponement). The trajectory of yields, coupled with an increase in the convexity of expectations, reflects a market regime dominated by caution, defensive arbitrage and the rapid revaluation of risk premiums.

4.3. Impact on credit spreads and capital flows

Protectionist policies also influence credit spreads, i.e. the difference in yield between a risk-free sovereign bond and a corporate bond of the same maturity. In times of trade stress, spreads tend to widen, reflecting heightened risk aversion. Companies with international exposure (particularly industrial and technology companies) see their financing costs rise, which can reduce their investment capacity.

In addition, cross-border arbitrage is intensifying. The search for yield may shift to geographic areas less exposed to trade tensions, or to bond segments deemed more resilient (inflation-indexed bonds, supranational debt, green bonds).

5. Outlook for 2025

As of May 5, 2025, the global macro-financial environment is profoundly influenced by the first economic decisions of the Trump II administration. Having taken office on January 20 for a second, non-consecutive term, President Donald Trump has swiftly introduced a series of protectionist measures on an unprecedented scale, including a universal 10% tariff and specific surtaxes targeting China and the European Union in particular. These decisions, several of which have already come into force, are heightening trade tensions and fuelling uncertainty over inflation and growth trajectories.

5.1. Macro-financial development scenarios

Three main scenarios can be envisaged for the end of 2025-2026:

• Prolonged inflationary scenario: if price rises exert sustained pressure on consumer prices, central banks, particularly the Fed, will be forced to maintain monetary policy. The yield curve could then bend towards a bear steepening, with long rates rising faster than short rates.
• Global slowdown scenario: a marked weakening in global demand, coupled with disruptions to international trade, could cause long rates to fall as investors flee to quality. This would result in bull flattening or an inversion of the yield curve, heralding a cycle of monetary easing.
• Controlled normalization scenario: if trade tensions stabilize and inflation remains contained, central banks could embark on a normalization path. The curve would then remain moderately upward, reflecting a balance between monetary prudence and moderate growth.

5.2. Anticipated investor behavior

Initial market reactions show an increase in volatility on long-maturity segments, and a tactical reallocation of portfolios towards bond assets perceived as safe havens. Institutional investors are adjusting their exposure by lengthening duration, integrating more inflation-indexed bonds, and reducing their exposure to issuers most sensitive to global trade flows. Hedging strategies (swaptions, caps/floors) are gaining in importance in portfolio management.

Conclusion

The protectionist measures announced and partially implemented by the Trump administration in April 2025 mark an assertive return to a form of economic sovereignism with multiple repercussions. By targeting China, the European Union and other strategic partners, these tariff hikes are reshaping global trade flows and prompting a rapid reassessment of macroeconomic expectations.

Analysis of the transmission mechanisms shows that these tensions have a direct influence on the structure of the yield curve: imported inflation, uncertainty about growth, ambiguity in monetary policy reactions. Bond markets react by reconfiguring term premiums, increasing volatility on long maturities, and reinforcing geographic and sectoral arbitrage.

The yield curve, both a synthetic indicator of macroeconomic expectations and a reflection of the risk premiums demanded by investors, is emerging as a central diagnostic tool in the forward-looking assessment of financial conditions over the coming months. It embodies the synthesis of antagonistic forces running through financial markets: inflationary shocks in the short term, fears of recession in the medium term, and enduring political uncertainties.

Against this backdrop, market players will need to demonstrate heightened vigilance, tactical flexibility and the ability to rapidly integrate weak signals. Active interest-rate risk management, supported by sophisticated hedging tools and a fine-tuned reading of implicit curves, is more than ever an essential lever for preserving performance and financial stability.