April 16, 2025: The Bond Market Not Behaving “As It Ought To”

The U.S. bond market has not behaved “as it ought to” when stock investors become nervous, as seen following President Trump’s Liberation Day tariff announcements. For the month, the S&P 500 is down nearly 4% and over 12% from its February 19^th high. Meanwhile, the U.S. Aggregated Bond Index has also declined, as long-dated Treasury bond prices fell and yields rose. Rather than viewing long-dated Treasuries as safe havens, investors seem to have seen them as sources of risk.

Several explanations have been offered. One is inflation anxiety: tariffs may increase consumer prices, a generally negative development for fixed income. Another is that broader tariffs raise recession fears and could further deepen the federal budget deficit. This, in turn, may increase the supply of U.S. debt and drive up interest rates. A third possibility is retaliation—countries hit by tariffs, like China or Japan, might respond by selling their U.S. Treasury holdings.

However, the most plausible, if less dramatic, explanation is that leveraged investors raised cash by selling their most stable assets—bonds—during a period of heightened stock-market volatility. While other factors may still be at play, the simplest explanation appears to be the most likely.

Weekly Market Update: April 16, 2025