Treasury ETFs In Focus As Trump's Tariffs, Fed's Rate Decision Shake Bond Markets

With former President Donald Trump threatening 25% tariffs on Mexico and Canada (though implementation of the tariffs has now been delayed), and the Federal Reserve holding interest rates steady, investors in Treasury ETFs are bracing for market shifts.

These developments could drive significant movements in bond yields, affecting ETFs that track long-term U.S. government bonds. More on that further on. First, here are three Treasury ETFs to keep an eye on:

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iShares 20+ Year Treasury Bond ETF TLT: This is one of the most widely traded Treasury ETFs, tracking U.S. government bonds with maturities of 20 years or more. Because of its long duration, the ETF is highly sensitive to interest rate changes. Over the past 5 years, the price has fallen 6% to $87.39 as of writing. The expense ratio is 0.15%.

Vanguard Long-Term Treasury ETF VGLT: VGLT provides exposure to U.S. Treasury bonds with maturities greater than 10 years. It tracks the the Bloomberg Barclays U.S. Long Treasury Bond Index and offers a slightly broader range of long-term bonds than TLT, bringing in more stable government-backed returns. The expense ratio is also lower at 0.04% compared to TLT.

SPDR Portfolio Long-Term Treasury ETF SPTL: SPTL offers a cost-effective way to gain exposure to long-duration Treasuries, tracking the performance of long-term U.S. government bonds. Its low expense ratio makes it attractive for long-term investors. The expense ratio is even lower at 0.03%.

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How Trump’s Tariffs Affect These ETFs

Trump's tariffs on Mexico and Canada could lead to higher import costs, potentially driving up inflation.

If inflation expectations rise, bond yields will likely increase as investors demand higher returns. Higher yields push down the prices of existing long-term Treasuries, causing Treasury ETFs like TLT, VGLT, and EDV to decline.

On the other hand, tariffs could weaken trade, disrupt supply chains, and slow economic growth. If investors anticipate a downturn, they may flock to safe-haven assets like U.S. Treasuries, pushing bond prices up and yields down. This might benefit long-term Treasury ETFs.

Adding to the layers of complexity is the Federal Reserve’s hawkish decision to keep interest rates unchanged, as inflation still remains a concern. The bond market, according to ING THINK, is also expecting inflation to stay around 3%. Because of this, the Fed isn’t likely to cut interest rates back to a “neutral” level of 3%, and long-term Treasury bond yields (like the 10-year Treasury) remain above 4.5%.

The combination of Trump's tariffs and the Fed's policy stance creates both risks and opportunities for Treasury ETF investors. If inflation rises and yields increase, long-term bond ETFs may struggle. However, if tariffs slow the economy and push investors into safe-haven assets, these ETFs could benefit.

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