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Investing Perspective published on April 17, 2018

Implications of Trade Uncertainty

Tariff announcements from the U.S. and China prompted an uptick in equity market volatility and a small slip in economic momentum in the first quarter. We break down the main implications of the China/U.S. trade negotiations for corporate and municipal bonds. We note that the situation is in flux, and many terms of the trade relationship need to be determined before a final outcome is reached.


  • For investment grade fixed income, the scale of the proposed tariffs is likely manageable for both municipal and corporate issuers.
    • The proposed 25 percent tariff on $150 billion of Chinese imports represents 0.2 percent of U.S. GDP.
    • In addition, tariffs are low on a historical basis, mitigating the impact of new tariffs.
  • While the direct impact of the tariffs could be small, the second order effects could be large.
    • Tit-for-tat trade discussions with China could spur market concerns that further protectionist policies could be rolled out, possibly stifling U.S. and global economic growth and increasing market volatility.
    • A full-scale trade war would likely meaningfully disrupt long-term capital planning for multinational companies and could depress stock prices as capital flows reorient.
    • Corporate earnings could disappoint investors, and lower stock prices and wider credit spreads are risks to the health of pension funds.
    • Tariffs would be expected to adversely impact sales into China and could disrupt some supply chains.
    • We would expect corporations with significant sales into China to address this risk in 1Q18 earnings statements or SEC regulatory filings.
  • We have not adjusted our overall economic outlook, but there is significant uncertainty surrounding the outcome of negotiations and the U.S./China trade relationship.
    • We expect increased market volatility in 2018.
    • Investment grade default rates remain low, and higher-quality municipal and corporate bond investments remain defensive as long as in-depth, fundamental research is used throughout the investment process.



[1] The U.S. Census, 2017.

[2] Export partner ranking and percent of country export data taken from the World Trade Organization, Trade Summaries for the U.S. and China, data based on total imports and exports from period 2012-2016.

[3] Global large company sales data is based on companies in the S&P 500 Index, data from the year 2017. Percentages are revenue exposure by country, data from FactSet, April 2018.

[4] Mackintosh, James. “Why Should Markets Care About a Paltry $150 Billion Trade War?” The Wall Street Journal. April 9, 2018.

[5] JP Morgan, 2016.

[6] Office of the U.S. Trade Representative,

[7] The World Bank, GDP data from 2016.


DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.

Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.