While markets have been plunging, government bonds have been selling off. This is out of the ordinary, and it is causing some international investors to lose faith in America.
Generally speaking, stocks are seen as a riskier asset class, while bonds are referred to as a “safe haven,” and they usually move in opposing ways. This is so because the United States backs government bonds, which are a kind of asset that are issued to help fund expenses and are to be repaid to purchasers with interest over a certain period of time.
The same cannot be true for the share prices of publicly listed corporations. Therefore, there is less demand for lower-risk bonds when stock markets are rising and investors are eager to wager on the success of US companies. In turbulent times, the opposite often occurs.
Why connections are fluctuating so much is a mystery to us.
Ajay Rajadhyaksha, Analyst at Barclays
Rather, sell-offs have occurred in both markets at the same time. This week, the yield on the 10-year Treasury note, the most popular U.S. government bond, jumped beyond 4.5%.
Bond prices and rates are negatively connected, thus higher yields suggest reduced interest for the bonds. The S&P 500 completed a week of erratic trading up 5.7%, recovering late Friday after a string of severe losses, while the 10-year Treasury yield ended the week more than 12% higher.
In a letter to clients headed “This is not normal,” Barclays analyst Ajay Rajadhyaksha said, “We don’t know exactly why bonds are gyrating so much.”
The cost of borrowing for the federal government is rising due to the skyrocketing rates on 10- and 30-year Treasurys. Additionally, the yield on the 10-year note is closely correlated with rates on credit cards, mortgages, and personal and commercial loans, which is terrible news for consumers.
“Almost all Americans care about this,” said Natalie Colley, a partner and financial adviser at Francis Financial, a business located in New York.
In reference to the more than 70 million American savers who have access to market-linked 401(k) retirement funds, she said, “The days of a pension are over.” Many account holders have been uneasy due to Wall Street volatility in recent weeks, which has forced some financial planners to serve as both therapists and therapists to their shaken customers.
Ernie Tedeschi, a former senior economist in the Biden administration and current head of economics at Yale University’s Budget Lab, said that “if Treasurys are not a safe-haven asset, that has major implications for balance sheets across the board — businesses, nonprofits, pensions, and households.” “The safety of U.S. Treasurys is a major premise of global finance.”
“The most concerning piece of data since the tariffs began” is how he described current patterns in the bond market.
“It’s demonstrating a decline in trust in the United States’ global role,” he said.
“There is nothing systemic about this,” Treasury Secretary Scott Bessent told Fox Business on Wednesday, dismissing such worries. I believe that the bond market is experiencing a painful but typical deleveraging.
However, analysts also see warning flags elsewhere. The dollar’s worth in relation to other world currencies has plummeted. It had its worst decline since 2022 this week, closing Friday at its lowest point since September.
Kyla Scanlon, a financial educator and author of “In This Economy?: How Money and Markets Really Work,” warned her TikTok followers this week that “everything in the U.S. is not doing well right now.” “The US dollar is losing value.”
“Markets don’t believe that the U.S. has a stable or clear economic plan,” she said, attributing the currency’s slide to “the erratic trade policy that we’ve seen.”
Similar worries were raised by Neel Kashkari, president of the Federal Reserve Bank of Minneapolis.
“Normally, I would have anticipated the dollar to rise in response to significant tariff hikes. He told CNBC on Friday, “I think the story of investor preferences shifting has some more credibility because the dollar is declining at the same time.”
There are a number of other reasons. One relates to the bond market wagering practices of hedge funds. Another possibility is that investors are seeking higher interest rates now to avoid future losses because they expect inflation to spike.
According to Douglas Boneparth, owner of the New York-based consulting company Bone Fide Wealth, “perhaps they or the market believe that the actions surrounding tariffs are actually going to create upward inflationary pressure.” “That might very well be a piece of this puzzle.”
Geopolitical issues are difficult to ignore, according to specialists who are more reluctant to attribute the bond sell-off’s reason.
The safety of U.S. Treasurys is a foundational element of global banking.
Ernie Tedeschi, Yale Budget Lab’s director of economics
Lee Baker, the founder of Atlanta-based Claris Financial Advisors, said, “I don’t want to go down that rabbit hole necessarily… the idea of other countries turning away from America.” “But in this specific case, America turned away from everyone else” by imposing severe new trade restrictions.
For the time being, financial advisors like Baker are warning their customers not to respond impulsively to the recent turbulence. According to Colley, younger investors who aren’t nearing retirement and who usually have less exposure to the bond market should stick with it.
A “financial moat that will insulate any investor at any point in their investing career from feeling panic around what’s happening in the stock market” can be established, she said, by “ensuring that you’re in an appropriate asset allocation for your stage in life” and accumulating some emergency savings. She advises having at least six months’ worth of cash on hand in case of emergencies.
According to Baker, older retirement savers may want to think about taking some precautions.
His company has started incorporating buffer exchange-traded funds, sometimes known as “defined-outcome” ETFs, which are linked to options contracts, into the portfolios of its customers. Although these funds are more costly and usually restrict possible gains, they have recently attracted a lot of attention and provide strong downside protections. Earlier this year, BlackRock introduced a new iShares buffer ETF, which it claims allows investors to “mitigate risk while participating in market growth.”
“There’s a whole lot of other stuff in the world beyond stocks and bonds” to think about investing in, Baker said, including infrastructure, private equity, and real estate. However, he warned that it’s always a good idea to speak with a skilled counsel first, in part to prevent making crucial financial decisions out of fear.
“We can definitely reduce your downside while giving you some upside with a combination of these things,” he said, adding that it’s probably not a smart idea to invest heavily in any of them.