US Bonds Took a Hit – Are They Still the ‘Safe’ Option?
US government bonds—long considered a safe harbour during market storms—have stumbled alongside equities in the wake of new tariff tensions, leaving investors questioning whether their go-to safety net still holds up.
When markets get shaky, investors often look to bonds to act as a stabiliser—something that can help soften the blow when equities fall. That’s usually how it works: shares drop, bonds rise (or at least hold steady), and the overall portfolio takes less of a hit.
But earlier this month, things didn’t go to plan. We saw both equities and bonds fall at the same time. The yield on the 10-year US Treasury shot up from 4% to 4.5% in just a week, which means bond prices were dropping fast. (Yields and prices move in opposite directions.)
Markets have calmed slightly since then, following a 90-day pause on some of Donald Trump’s tariff policies, which helped push yields back down to around 4.4%. Still, the fact that bonds didn’t provide their usual buffer during the initial market wobble has caused concern.
A quick refresher on how bonds work
Bonds are essentially loans to governments or companies. In return, they promise to pay you a fixed interest rate for a set period—say, 10 years—and repay the original amount at the end.
Once issued, the price of a bond can move based on demand. When prices fall, yields go up. So, if you hear about yields rising sharply (like we’ve just seen with US Treasuries), it’s because bond prices are falling.
Why are US Treasuries seen as ‘safe’?
They’re backed by the US government, which is generally seen as extremely unlikely to default. That makes Treasuries a go-to option for investors looking to reduce risk or park money during volatile times.
So why are people selling them?
The recent tariff plans have increased concerns about inflation. If inflation rises, interest rates might have to follow, and that’s bad news for existing bonds. Investors want a higher return (yield) to compensate for this risk, so they sell off current holdings, driving prices down and yields up.
On top of that, there’s nervous chatter about whether China might offload some of its enormous $760 billion stash of US Treasuries as relations with the US remain tense. If they did, that much selling could really shake bond prices.
Do bonds still work as a diversifier?
Historically, bonds and equities moved in opposite directions. That inverse relationship worked well for diversified portfolios. But in 2022, things shifted. Inflation took off, central banks raised rates, and bonds started moving with equities, not against them.
Last year, we started seeing some return to normal as rate hikes slowed and talk of cuts began. But recent political developments have once again disrupted the bond market’s usual behaviour.
We’re not quite back to the classic negative correlation between stocks and bonds—and this may just be a temporary blip. But it’s a reminder that diversification isn’t always perfect in the short term.
So, what should you do about it? Probably nothing. Markets go through phases, and while bonds haven’t behaved as expected over the past few weeks, that doesn’t mean they’ve lost their long-term value in a portfolio.
As always, it’s about staying focused on your broader plan and not reacting to every market movement.
Will is an Independent Financial Adviser with over a decade of experience helping expats make the most of their international status.