President Donald Trump’s tariff-raising campaign has highlighted the extreme volatility in the bond market. When he initially announced the extremely high tariff rates on imports from most countries, many economists cut their estimates for U.S. gross domestic product growth. Similarly, traders ratcheted up their bets that the Federal Reserve would cut interest rates based on the premise that tariffs would slow the U.S. economy and threaten to push it into a recession.
Usually, when conditions similar to these occur, Treasury bond prices rise — which means their yields fall — because movements in the bond market tend to be a reflection of investors’ expectations about economic growth and the directions of interest rates. Investors also tend to rush toward safe assets when they are worried about economic slowdowns. Generally speaking, when stock prices move downwards due to market fears about slowing growth, bond prices tend to rise.
But amid these wild market conditions, longer-term yields have not followed their usual predictable script. Initially, Treasury yields fell hard on the tariff talk, but in recent days, they’ve surged, with the yield on the 10-year U.S. Treasury nearly reaching 4.5%. Even after Trump on Wednesday put a 90-day pause on the larger share of his new tariffs for most countries except China, the 10-year Treasury yield, as of Thursday, was still at 4.35%.
In light of all this, should investors avoid longer-term U.S. Treasury notes and bonds right now?
While the Federal Reserve’s benchmark federal funds rate influences Treasury yields, they are more or less driven by the market’s expectations. Treasury yields have been in focus for several years now, with bond investors increasingly focused on the U.S. debt situation. The federal government ran a deficit of more than $1.8 trillion in its fiscal 2024, and carries more than $36 trillion in total debt.
There are a few reasons Treasury yields surged during the tariff chaos, and none of them are particularly bullish for the economy or stock market. A positive reason for higher yields would be a renewed belief in economic growth, but traders instead have been increasing their bets that the Fed will cut interest rates. At this point, the median view among options traders is still that there will be three quarter-point rate cuts this year, although it’s important to recognize that these predictions change often.
However, Fed Chair Jerome Powell has been clear that he’s not going to cut rates into an economy that’s on solid footing, especially with annual inflation still over the Fed’s 2% preferred target. This means that if rate cuts happen, it would likely be in the context of supporting a weakening U.S. economy or one on the precipice of recession.