Shriya Samarth, BwB Senior Advisor
Capital markets around the world have spent the past few months carefully reacting to a lot of ‘T’ words: Trump, tariffs, Tesla, trade deficits... President Trump’s second term is already defined by an aggressive ‘America-first’ stance that is almost as all-encompassing as Melania’s inauguration hat. From commodity traders to climate change activists, Trump’s first couple of weeks in office have reinforced the value of dollar-denominated assets while also bringing the future of sustainable investing into question. Given the US’s global hegemon status, there seems little reason to doubt that Trump’s anti-ESG positioning will affect the global transition to renewable energy for years to come.
The Yikes Behind the Yields
Like SpaceX rockets, US Treasury yields have been attempting previously unimaginable heights since late October 2024, ahead of Trump’s victory. The announcement of his policies and plans in recent weeks have been accompanied by significant volatility in the 10-year US Treasury as traders contemplate whether nationalist growth policies are inflationary and demand higher returns on the risk-free rate to match an environment where prices continue increasing.
In the first trading weeks of January, the 10-year US Treasury traded in an unusually wide range of 20bps, from around 4.60% to above 4.80%, with a chance that the 5% mark could be reached by the time Trump’s policies trickle down into the economy. In making tariffs and large-scale deportation central to his stated strategy and policy initiatives, Trump risks inflation because both limit supply – of goods imported into the US and of labour, respectively. When supply is limited and demand stays constant, prices necessarily increase, creating an inflationary cycle that is difficult to combat with monetary policy such as interest rate hikes by central banks.
Higher Treasury yields are especially concerning in an environment where the Federal Reserve (Fed), the US’s central bank, has been reducing the relatively high deposit rate to tackle post-pandemic inflation. Higher interest rates are a direct contrast to the Fed’s prior guidance that rates will come down from 2022 highs – and a warning sign that inflation and the cost of living crisis are not over, despite the US economy boasting a 3.1% annualised quarterly GDP growth rate in Q3 2024, significantly ahead of other developed economies such as the UK, which had near-zero growth in 2023, experiencing technical recession in latter six months of the year, and struggled to regain momentum in 2024. The US economy is hot, and yields are pricing in the risk that the heat gets out of control. At the same time, 2024 was the hottest year on record, with a global average temperature of 15.10°C, and climate change risk isn’t cooling down.i
The combination of rising yields and inflation risk creates an unfavourable investment environment for renewable energy projects, which often require long-term, low-cost financing. With higher borrowing costs, developers of wind and solar farms may struggle to secure funding. Meanwhile, fossil fuel projects – which are often backed by established, high-margin industries – may remain attractive to investors despite long-term climate risks.
A sustained increase in US Treasury yields will directly limit the supply of sustainable issuances that are absorbed by global investors. Interest rates represent the cost of financing, and the deposit rate set by a central bank is the cheapest rate that a borrower could theoretically raise cash or the lowest rate that an investor could receive on cash returns. The US Treasury is considered as risk-free as it gets, and subsequently any credit risk from an issuer that is not the US government will need to pay higher returns than currently elevated US Treasury yields.
Many ESG assets and developing market instruments are priced in US dollars (USD) to attract more funding – but increases in US Treasury yields raise the cost of financing, creating an additional expense for issuers. Alternative instruments such as green bonds and thematic bonds, and impact investing, are now much harder to sell to an investor who expects a higher baseline return compared to a US Treasury. If a corporate bond trades at a 2% risk premium to the US Treasury, investors would likely expect any such USD-based issuance to now yield over 7%, given that the US Treasury itself pays close to a 5% annualised coupon. The 10-Year US Treasury rose by 60bps over the course of 2024, driven in part by market expectations over Trump’s policy direction should he take back the Presidency. This increase represents approximately US$60,000 in additional interest that a corporate or non-US sovereign issuer would have to pay on a US$10m issuance. Finding that additional money is a challenge for many cities and local authorities looking to raise funding for sustainable redesigns or infrastructure projects, and is an unwelcome shock given that US interest rates were expected to fall below 4% just six months ago but are now unlikely to land this low in the short-term future.
Under the Influence of a Strong Dollar
Trump has clearly won over many Americans, and his ‘me-first’ attitude has certainly helped him as a businessman. Extending that attitude to his second term as President risks a spillover effect that other countries will follow his lead – if only to replicate the dollar’s strength following his election victory. Following Trump’s announcement on Inauguration Day of his intention to withdraw the US from the Paris Agreement, it will be one of only four countries that have not ratified the agreement – the others being Iran, Libya, and Yemen, none of whom are known for the strength of their emissions-reducing policies. With political uncertainty from a freshly formed government in France, elections to be held in a politically divergent Germany, and similar battles for power across the globe, Trump’s decision may encourage other world leaders to abandon critical climate change agreements.
The exchange rate (FX) between the pound sterling and the US dollar, which was US$1.27 in Q4 2024, hit a low of US$1.21 in early January when doubts over the UK’s fiscal deficit management caused UK gilt yields to rise and sterling to plummet to 14-month lows. The dollar also remains strong against the euro (EUR). Last summer, EURUSD was US$1.12 before plummeting to post-US-election lows of US$1.02 after Trump’s pro-US policies strengthened the dollar and Europe’s political infighting in France and Germany weakened the euro. A stronger dollar under Trump may encourage other world leaders to reconsider their global commitments to combatting climate change and refocus on their FX strength, which would exacerbate an existential global issue at a time when cooperation should be prioritised over currencies.
Burdens Still to Bear
When Trump withdraws from global compacts such as the Paris Agreement, the World Health Organization, and, potentially, NATO, the costs for such groups to continue their activities still exist, creating a greater financial burden for the remaining members. In his first term, Trump publicly criticised the overreliance of NATO members on US funding – and at his recent speech at Davos 2025, he demanded his European allies increase their NATO spending to 5% from 2% or risk facing US tariffs.ii While the justifications for such a demand are debatable, the implications are dire for countries such as France and Germany that are struggling to reduce their budget deficits. In early December, France’s government collapsed following a vote of no confidence in the country’s prime minister and failure to agree on how to reduce the huge budget deficit of 6.1% of GDP. Germany boasts a 2.5% budget deficit, but is also recovering from a governmental collapse when Chancellor Olaf Scholtz also lost a confidence vote. Both economies are posting quarterly GDP growth rates that are worryingly low for the former powerhouses of the Eurozone – 0.4% for France in Q3 2024 and only 0.1% for Germany. For them to shoulder the burden of an increased NATO bill at a time when they are struggling with financial stability creates a stressful situation: in times of such belt-tightening, renewable energy investments and sustainable infrastructure projects are easy to cut.
Trump’s demands come from a position of leverage. Unlike the US, which achieved energy independence in 2019 and is likely to repeat its success with Trump’s mantra of “Drill, baby, drill”, Germany was heavily energy-reliant on Ukraine. The European Union (EU) in general is much more affected by the Russia-Ukraine war than the US by simple nature of proximity, and thus when Trump pulls American funding or places demands on his NATO partners, Eurozone countries may be forced to confront unaffordable bills.
The Tariff Tantrum
When Trump implemented tariffs on construction metals and a range of goods from China during his first term as President, the inflationary impacts on the US economy were actually quite limited – with the Fed even cutting the deposit rate to 0% - 0.25% during March 2020 as a response to the coronavirus pandemic.iii However, tariffs on European aluminum and steel created a back and forth of retaliation, roll backs, and duty-free quotas that lasted well into President Biden’s subsequent term of office. In Trump’s second term, just the vague threat of up to 25% tariffs on EU exporting economies (namely, manufacturing-heavy Germany) caused additional volatility in bond markets the week commencing 3 February 2025. German sovereign debt yields opened 5-7bps lower as investors rushed to lock in higher yields. This drove up prices – after all, the impact of the tariffs from the perspective of struggling Eurozone economies is more related to terminal interest rates than the tariffs themselves. With low growth prospects further hampered by potentially tariffed exports, the European Central Bank is priced to cut rates an additional 15bps from just a week ago – with the year-end deposit rate now predicted to land at around 1.75% instead of about 1.90%.
Lower interest rates generally bode well for any corporate or credit issuance (which trades at a premium to the relevant sovereign issuance) – including cash raised by municipalities for sustainable growth projects. During lower interest rate periods, cheaper coupons can meet an investor’s required rate of return, and ESG issuances can therefore benefit from the lower sovereign bond yields that come from tariff fears. However, the general gloom of the Eurozone economy remains a risk that should not be overlooked – investors may, on the other hand, demand a higher coupon or rate of return to justify spending their cash on higher-risk sustainable projects during an economic downturn.
When then-Chancellor Angela Merkel represented Germany in her visit to the White House in 2017, President Trump famously refused to shake her hand. This snub was so significant that she used it to market her recently released memoir. This serves as a reminder that Trump’s impacts on international relations and climate change commitments are volatile. His recent political stance risks the future of hard-earned sustainability successes and requires nations to be vigilant and adopt an attitude of cooperation at a time when individualism appears to be more influential.iv
Shriya is a senior advisor at BwB and a senior rates trader at StoneX Group, a sell-side broker-dealer. She looks after London Rates Trading, focusing on European and US government bonds and has 10 years of trading floor experience across Fixed Income and Financing. All opinions expressed here represent the views of the author and not those of her employer.
Endnotes
i. Copernicus Climate Change Service. (10 January 2025). ‘Copernicus: 2024 is the first year to exceed 1.5°C above pre-industrial level’. Copernicus Climate Change Service. (link)
ii. Cingari, P. (23 January 2025). ‘Trump at Davos: NATO 5% push, tariff warnings for Europe. Euronews. (link)
iii. Gertz, G. (10 September 2020). ‘Did Trump’s tariffs benefit American workers and national security?’ Brookings Institution. (link)
iv. Economic indicator data used in this article retrieved from Trading Economics (link). Composite pricing data retrieved from Bloomberg (link).
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