Reciprocal tariffs, but not as we know them

“Liberation Day” has landed, and not with a whimper. In extraordinary scenes in the Rose Garden of the White House, President Trump held up a board outlining the level of tariffs the US will impose on countries around the world, and in most cases they were worse than worst-case expectations.

If we look at the main drivers of returns in Q1 2025, the first one that comes to mind is tariffs. But while this is true for equities and credit spreads, in the context of global fixed income the main driver of total returns in Q1 was the Bund sell-off triggered by a momentous shift in German fiscal policy.

Bondholder expectations are an important topic in the Additional Tier 1 (AT1) market. They are often perceived as a “soft” factor that is hard to quantify, and may often appear at odds with the purely economic considerations of the issuer when it comes to refinancing costs.

With the recent economic spotlight dominated by President Trump’s rhetoric and Germany’s blockbuster fiscal expansion plans, Wednesday brought the UK back into focus with the latest round of inflation data and the Spring Statement from the Chancellor, Rachel Reeves.

Contentious call decisions from high profile issuers can provoke a fair bit of debate and emotion among participants in the Additional Tier 1 (AT1) market, and Deutsche Bank has put itself in the spotlight by announcing it will be calling only one of two AT1 bonds approaching their call dates.

Last week we wrote about a notable shift in market sentiment and how this had impacted our view of relative value within fixed income. So, where has the impact been felt, and has it changed our view on relative value?

Following the introduction of the European Union’s securitisation regulations in 2013, the Australian securitisation market initially lagged behind in aligning with European investors’ standards. Over the past decade, however, the market has undergone significant changes and recent record issuance shows investors are increasingly seeing the opportunity in Australian ABS.

Volatility in Bunds seems to have calmed down slightly in the last few days as markets continue to digest huge fiscal expansion plans from Germany and the European Union. At the same time, many forecasters have been downgrading their US growth projections after reassessing the level of pain President Trump seems willing to inflict on the US economy in order to implement his policy agenda.

With the UK’s Office for Budget Responsibility (OBR) set to publish its updated economic and fiscal outlook on March 26, we are starting to see headlines concerning potential changes the Labour government could make to its budgeting plans in response to shifting forecasts.