Tariffs create uneven outcomes, but they can also present opportunities

Authored by:
Jeff Helsing, Institutional Fixed Income Strategist
Blerina Uruçi, Chief U.S. Economist, TRPA
Cindy Huang, Public Credit Analyst, TRPA
Izzy Goncalves, Private Credit Product Specialist, OHA

Tariffs are taxes imposed by the federal government on imported goods and services and are paid by the domestic company or individual importing the goods. They are used to increase the relative cost of foreign goods and services and serve various purposes: generating revenue for the government, protecting domestic industries from foreign competition, and influencing trade policies.

In this Q&A—to better understand how tariffs create uneven outcomes in the U.S. fixed income markets—Institutional Fixed Income Strategist Jeff Helsing converses with Chief U.S. Economist Blerina Uruçi, Public Credit Analyst Cindy Huang, and Oak Hill Advisors L.P. (OHA) Private Credit Product Specialist Izzy Goncalves.

Jeff: Blerina, since 2020, we’ve observed a significant rise in the prices of goods and services. While tariffs increased to approximately 3% in 2018, primarily affecting Chinese imports, do you think the tariff policy announced on April 2—estimated to impact 15% to 20% of imports¹—will result in higher inflation?

Blerina: Jeff, this is a question many clients are asking, and as I discussed in more detail in a previously published report, it depends. By definition, inflation is a persistent increase in the pace at which prices are adjusted. In contrast, a tariff is a one‑time increase in the price level—not a sustained shift in the rate of inflation. After reviewing the proposed reciprocal tariffs, we estimate the net effect of tariffs is likely to be negative for the U.S. economy. Although the federal government and U.S. producers in protected industries stand to benefit from tariffs, U.S. companies and consumers are likely to pay the price. Exporting countries such as those in Asia, Europe, Mexico, and Canada may also see a decline in demand, which may result in lower interest rates and currency values. The resulting increase in economic uncertainty associated with this substantial rise in tariff policy, among other considerations, is likely to raise the equity risk premium and steepen curves in U.S. Treasury markets.

"... economic uncertainty associated with this substantial rise in tariff policy, among other considerations, is likely to raise the equity risk premium and steepen curves in U.S. Treasury markets."
Blerina Uruçi, Chief U.S. Economist, TRPA

Jeff: Thanks, Blerina. In Q1 2025, there was a 4% decline in the S&P 500 and nearly a 10% decline in small‑caps as represented by the Russell 2000 ahead of the April 2 tariff announcements. In addition, the U.S. dollar index declined by 4%, and the 10‑year and two‑year U.S. Treasury yields declined by roughly 36 basis points to 4.2% and 3.9%, respectively. While tariff policy isn’t the only consideration, risk premiums and uncertainty rose, as your publication suggested. Izzy, price movements in private markets are slower and typically less pronounced. What are you and OHA’s team of over 120 investment professionals globally seeing in private credit?

Izzy: Jeff, as you know, our investment process for private credit is driven by bottom‑up opportunities and rigorous credit selection. Changes in government policies that create uneven outcomes can expand the opportunity to provide bespoke financing solutions to great companies facing balance sheet strains. As Blerina said, the rising uncertainty that impacted the equity risk premium typically makes the financing cost and complexity rise for the most leveraged companies. For example, if a leveraged buyout of a company was originally financed at a loan to value (LTV) of 50%, and the equity valuation multiple of the company declined by 25% near the time to refinance the debt, the current LTV would be closer to 67%, all else equal. Lenders may not be willing to refinance the company at the higher LTV. Other borrowers with capital structures created before the Fed started hiking rates in 2022 may have difficulty sustaining debt service if interest rates remain elevated. Well‑positioned lenders can participate in restructurings of existing debt or liability management exercises that improve liquidity and/or reduce leverage for these borrowers and may generate premium spreads for investors.

"Changes in government policies that create uneven outcomes can expand the opportunity to provide bespoke financing solutions to great companies facing balance sheet strains."
Izzy Goncalves, Private Credit Product Specialist, OHA

At OHA, we focus on the upper end of middle market—or large‑cap—borrowers, consistent with our focus on downside protection and recession‑resistant sectors and issuers. We believe this approach is particularly well suited to volatile market and uncertain economic backdrops. Policy changes that create uneven outcomes usually expand our alpha‑generation opportunities. While deal flow can be episodic, we expect robust deployment over time.

Jeff: Appreciate the big‑picture perspective on how equity market valuations impact the loan to values and credit premiums in private credit, Izzy. Let’s dive into even more detail on industry impact. Cindy, as a credit research analyst covering the automotive industry, you are well‑positioned to share insights based on your analysis and access to management of auto manufacturers, otherwise known as original equipment manufacturers (OEMs). Please share some perspective on what’s been discussed.

Cindy: Thanks, Jeff. For background, I’m on the T. Rowe Price Associates, Inc., (TRPA) Fixed Income team focused on credit research for European auto manufacturers, but I recently coordinated with our equity research and my teammates that cover U.S. OEMs and auto suppliers, among others, to share insight on tariff policy and its potential impacts. While I expect the net impact on credit will be negative in aggregate for the largest issuers, it really depends on how willing consumers are to pay higher prices and any potential mitigating action OEMs are able to take. However, we expect lower margins for the sector from both the direct impact of the tariffs and second‑order effects such as increased competition in Europe, as Asia‑produced vehicles originally bound for the U.S. market are redirected into the European market. We also see volume risk for the sector. The latest S&P Mobility forecasts² point to flat global light vehicle production for 2025, but we see downside risk to these estimates following tariff announcements. A higher risk of global recession also raises volume risk in both the short and medium term.

"While I expect the net impact on credit will be negative in aggregate for the largest issuers, it really depends on how willing consumers are to pay higher prices and any potential mitigating action OEMs are able to take."
Cindy Huang, Public Credit Analyst, TRPA

The potential impacts by individual credits can vary greatly, but we view manufacturers with North America assembly and high North American content on vehicles sold into the U.S. as better positioned than those who assemble vehicles abroad or import significant parts. As such, we believe that the impact on the Detroit, Michigan‑based manufacturers collectively, while negative, should be manageable, while Asian manufacturers will be worse hit.

On the other hand, there are some companies that supply parts where the higher relative cost of imported goods makes their products more competitive, so as you said, it creates uneven outcomes, and this is why independent bottom‑up analysis can be additive for making investment decisions. While as lenders we don’t expect this will meaningfully impact the ability for the companies to pay timely interest or make principal payments, it’s helpful to have the insight from equity analysts because as long‑term valuations of the company change, it can impact the costs of refinancing debt—which is important to credit analysts.

Jeff: It appears that the uneven impact of tariff policy tends to be more negative for issuers on average. However, increased clarity on tariffs could help reduce the uncertainty premium. As Blerina mentioned, a significant one‑time increase in tariffs is unlikely to lead to a sustained shift in the rate of inflation. Nevertheless, the size and scope of the announcement on April 2 heighten the risk of a more substantial decline in investment and spending as private sector confidence wanes. Policy changes, including tariffs, underscore the potential need for a diversified and actively managed approach to global fixed income, equity markets, and private credit. The TRPA and OHA Fixed Income investment teams anticipate that intermediate‑ and longer‑maturity yields will rise relative to shorter maturities in the U.S. They also see more opportunities in sub‑investment‑grade markets, both public and private, particularly in larger companies with pricing power over those that may struggle to pass on higher costs.

 

 

T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward‑looking statements, and future results could differ materially from historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for analysis are based on information gathered by T. Rowe Price and from third‑party sources and have not been verified. Forecasts are based on subjective estimates about market environments that may never occur. Any forward‑looking statements speak only as of the date they are made. T. Rowe Price assumes no duty to, and does not undertake to, update forward‑looking statements.