Protectionism and Safe-Haven Demand: Sovereign Bond Reactions to the 2025 U.S. Tariff Announcement

Abstract

We examine sovereign bond market reactions to the U.S. "reciprocal" tariff announcement on April 2, 2025, using daily returns from 61 countries. Government bond prices rose following the announcement, consistent with a flight-to-safety response amid heightened global uncertainty. Crosscountry variation reflects three main drivers: tariff exposure, fiscal fundamentals, and export orientation. Bonds from countries facing higher tariffs experience stronger gains, but this effect weakens for sovereigns with poor credit quality or high unemployment. Moreover, bonds issued by net exporters underperform, suggesting that investor concerns center on structural vulnerabilities rather than general trade openness. Overall, the results highlight the selective nature of the flight-to-safety dynamic during episodes of rising protectionism.

Keywords: tariffs, trade policy, sovereign bond markets, protectionism, event study, market reaction, international finance, safe haven JEL Codes: G00, G11, G12