The Bond Markets Make a Tariff Statement
Given the flurry of tariff announcements (which are still ongoing) and elevated equity market volatility, investors may have understandably taken their eye off the U.S. bond markets. But there’s been action in U.S. Treasurys that is worth a closer look.
In the immediate days following President Trump’s April 2nd “Liberation Day” tariff announcement, Treasury bonds behaved as we’d expect them to. As stocks sold off sharply, investors poured into “risk-free” Treasury bonds, which sent bond prices higher and yields lower.1
But then something interesting happened.
Starting on April 4th, Treasury bonds endured sustained selling pressure (with prices falling and yields rising) as stocks also fell, which added another layer of confusion to an already uncertain market environment. Given the U.S. Treasurys’ status as the world’s safe-haven asset during periods of global economic and market upheaval, one would have expected bond prices to rise as stocks fell. But the opposite started occurring. Investors were dumping Treasurys and stocks at the same time, with the 10-year Treasury yield notably jumping from 4.20% to over 4.50% within a four-day stretch. That marked its steepest increase since the 2008 financial crisis.
10-Year U.S. Treasury Bond Yields Spiked in the Wake of “Liberation Day”
One possible explanation for the sharp move in Treasury yields is rising inflation expectations. Treasurys are caught in a tug-of-war between growing recession fears (which would send yields lower) and the possibility of higher inflation due to tariffs (which would send yields higher). Perhaps inflation concerns were winning the day.
Another explanation is more technical. Institutional investors unwound complex leveraged trades en masse, such as basis trades, which rely on small price discrepancies between Treasury instruments. As yields spiked, these trades became unprofitable, forcing hedge funds to liquidate positions rapidly—which intensified the upside volatility.
The U.S. dollar also deserves a mention here. The dollar has long been the dominant reserve currency worldwide. The greenback is widely used by governments and institutions to stabilize their own currencies, manage trade flows, service debt, and prepare for unexpected economic shocks. And because global commerce is so often conducted in dollars, there’s a persistent demand to hold them—typically parked in U.S. Treasurys. In this sense, ongoing demand for U.S. dollars and Treasurys keeps yields in check.
There’s an argument that evolving trade dynamics are prompting some investors to re-evaluate the dollar’s centrality in global transactions. Central banks and sovereign investors aren’t pulling back per se, but they appear slightly more cautious when it comes to increasing their U.S. Treasury holdings. This could put upward pressure on yields over time.
Whatever the ultimate reason for the surge in 10-year Treasury bond yields, the message was clear: financial markets were not responding well to the proposed global order on trade.
Then came the 90-day pause, after which the stock market delivered one of its largest single-day rallies in history. In hitting the pause button, the worst-case scenario was taken off the table, and stocks surged. As I wrote in a Mitch on the Markets column two weeks ago, “[good news] will almost certainly trigger strong moves higher, [and] long-term investors simply cannot afford to miss these upswings.”
This brings me to a final point I’d like to make about market volatility, which is a point I’ve made many times before: remember that volatility works both ways. The very best days in the stock market often occur in close proximity to the worst days, often by less than a week. It’s basically impossible, in my view, to time the market so you only participate in the up days but avoid the down days.
The chart below zooms out and looks at the relationship between a surge in volatility and forward market returns. As readers can see, the previous instances when volatility reached extremes occurred in 2008 and in 2020. In both instances, stocks (as measured by the Russell 1000 Index) posted double-digit gains in the following six months.
Bottom Line for Investors
The recent spike in Treasury yields and unusual cross-asset selling are signs that markets are grappling with a complex mix of policy uncertainty, shifting inflation expectations, and evolving global trade dynamics. Investors should expect heightened volatility to continue in the near term, as trade policy is negotiated and news updates hit the tape.
But it’s important to remember that volatility—especially in response to political or policy-driven events—works both ways, and we have already seen how major moves in the market can prompt the administration to step-in with actions to de-escalate. There is still plenty left to learn on tariff and trade policy—but at least for now, the direction of travel appears to be away from the most punitive starting point.
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